US markets put together their strongest quarterly performance in years during Q2 2026, driven by an AI capital-expenditure cycle that pulled risk appetite higher despite sticky inflation and an active military conflict in the Middle East. The quarter’s story was simple: earnings delivered, and the market re-rated growth assets aggressively.

The quarter in US markets

Every major US equity benchmark posted double-digit gains. SPY closed Q2 at $746.80, up 15.1% over the quarter. QQQ led with a 27.7% move to $736.40, reflecting the outsized contribution of mega-cap tech and semiconductors. IWM gained 21.4% to $300.50, a signal that the rally broadened beyond the largest names. DIA added 13.2% to $522.40, the narrowest gain of the four but still a strong quarter for blue chips. The VIX collapsed 34.9% to 16.45, compressing from elevated levels as Iran-related tail risk faded through June.

The dominant theme was AI infrastructure spend. Combined big-tech capital expenditure commitments exceeded $650 billion, with Microsoft’s Azure growing 40%, Nvidia posting $81.6 billion in revenue (up 85% year-over-year), and Meta raising its 2026 capex guidance to $125-145 billion. S&P 500 earnings growth tracked around 27% year-over-year for the Q1 2026 reporting season — the strongest print since 2021.

Winners and losers

Technology (XLK) was the clear leader at +43.5%, closing at $190.50. The semiconductor complex drove the bulk of those gains as the AI buildout pulled forward demand for GPUs, high-bandwidth memory, and data-center networking gear. The rally broadened from Nvidia into AMD, Micron, Intel, and Qualcomm — a healthy development for the durability of the trade.

Industrials (XLI) posted a 14.8% gain to $185.20, benefitting from defense spending tied to the Iran conflict and reshoring capital flows. Financials (XLF) rose 9.0% to $53.61, supported by steeper short-term rate expectations after the Fed’s hawkish June dot plot. Healthcare (XLV) gained 8.7% to $158.70.

Energy (XLE) was the worst-performing sector, falling 12.7% to $53.11. WTI crude dropped 31.4% to $69.50 as the Iran risk premium unwound through late June and demand concerns resurfaced. Gold fell 13.4% to $4,023 and silver dropped 20.4% to $59.48 — both reversing safe-haven flows as equities absorbed capital. Copper bucked the commodity selloff, rising 10.8% to $6.193 on data-center power and electrification demand.

What drove Q2 2026

Three forces shaped the quarter. First, the Fed held rates at 3.50-3.75% at both the May and June FOMC meetings. The June dot plot was the hawkish surprise: the previously penciled-in 2026 rate cut was erased, with the median year-end projection nudged to 3.8% and nine committee members projecting at least one hike. Markets initially sold off on the June 17 statement, then rallied as the “higher for longer” framing was read as confidence in growth.

Second, inflation re-accelerated. CPI hit 3.8% year-over-year in April and 4.2% in May, the highest since early 2023. Energy prices spiked 23.5% year-over-year in the May reading, driven by Strait of Hormuz disruptions during the US-Israel military operation against Iran. Core CPI held at 2.9%, suggesting the headline move was supply-shock, not demand-pull.

Third, Q1 2026 earnings were exceptional. Apple printed $111.2 billion in revenue with 22% EPS growth. Alphabet hit $109.9 billion. Meta’s 33% revenue growth to $56.3 billion underscored the monetization of AI-driven ad targeting. The aggregate message: AI capex is converting to revenue, not just promises.

Q3 2026 outlook

The setup entering Q3 is a market trading at rich valuations with strong earnings momentum, a hawkish central bank, and an inflation trajectory that could force policy action if it doesn’t cool. The VIX at 16.45 prices in relatively low volatility against a dense event calendar.

The July 14 June CPI print is the first major test. If the headline continues above 4%, the July 28-29 FOMC meeting becomes a live event for a hawkish shift in language or a potential rate hike. The advance Q2 GDP estimate lands July 30 — the same week big tech reports earnings (Microsoft, Alphabet, Meta, Apple, and Amazon are all expected in the July 27-31 window). That single week could set the tone for the rest of the quarter.

Bank earnings kick off around July 13-17 (JPMorgan, Citi), offering the first read on credit conditions and loan growth. The September 15-16 FOMC meeting includes updated projections and a fresh dot plot — the market will spend all of August pricing that outcome. Jackson Hole runs August 27-29, with the theme “Financial Innovation: Implications for Payments and Policy.” Nvidia reports in late August, a de facto macro event given the stock’s weight across indices.

Rates are worth watching: the 10-year yield closed Q2 at 4.372% (up 1.4% on the quarter) while the 30-year edged down 0.6% to 4.864%. That mild flattening reflects a market pricing near-term inflation risk but not a structural growth downshift. The dollar index firmed 1.2% to 101.2, and USD/JPY pushed to 161.9 — levels that previously triggered Bank of Japan intervention talk.

What we’re watching

Inflation trajectory. June and July CPI prints will determine whether the Fed’s patience holds or breaks. A third consecutive month above 4% would make the September dot plot a very different conversation.

AI capex durability. Q2 earnings from hyperscalers will show whether the $650 billion-plus spending commitments are accelerating, plateauing, or showing any signs of pullback. XLK’s 43.5% quarter priced in a lot of good news.

Iran de-escalation. WTI at $69.50 already prices out much of the conflict premium. Any re-escalation in the Strait of Hormuz would reverse that unwind fast, feeding back into CPI and complicating the Fed’s position.

Small-cap follow-through. IWM’s 21.4% Q2 gain was the broadening signal bulls wanted. Whether that holds through tighter financial conditions and a hawkish Fed will test whether this is a genuine cycle turn or a liquidity-driven overshoot.