Q2 2026 Market Outlook: Investing in a Time of Dichotomies

By Elizabeth R. Levy, CFA 

We are living in a time of questions, contradictions, and dichotomies. Artificial intelligence (AI) is either coming for all of our knowledge and creative jobs, or its work is expensive “slop” that companies are regretting spending so much on. Its infrastructure buildout is either going to be a decade-long investment opportunity, or it’s a bubble about to burst. Citizens, consumers, and tech lords in the upper leg of the “K-shaped economy” are feeling flush with stock market returns, while consumers in the lower leg are worried about skyrocketing food and energy prices. The war in Iran is either over or it’s not; the Strait of Hormuz is either open or it’s not.  

Somehow, reasonable people—or at least reasonable-ish people—could argue any of these. And yet, they can’t all be true at the same time—and they all have market implications. Our challenge during this wild ride continues to be how to steer our portfolios in these turbulent times.  

We will get into more details below but want to highlight how we are positioning our clients’ portfolios for these uncertain markets, which will not be a surprise or a new message. We continue to manage portfolios with a “barbell” strategy, with concentration at both ends of the risk spectrum, and a moderately defensive overall positioning. Our intention is to build portfolios that will participate with the market should it continue to gain ground, and we see many reasons to believe it may. We also seek to provide some shelter from the storm if it does not, as we also see factors that could tilt in that direction. This is consistent with what we have been saying for the last few quarters—we are continuing to focus on building resilient portfolios crafted for the long term, comprised of high-quality companies that meet our social and environmental standards, while being mindful of dual-sided potential economic or geopolitical threats and opportunities. 

Taking Stock 

The overall U.S. stock market, measured by the S&P 500, rose by nearly 15% during the second quarter, wiping out the first quarter’s 4.6% loss. All the gains came during April and May, as the market fell slightly in June.  

Under the hood of that banner performance, the market remained volatile and subject to the will-they-or-won’t-they dynamic of ending the Iran war, which the stock market essentially looked past by the end of the quarter. While energy-market experts spent the spring warning of the dire consequences of an extended war, the extremely elevated oil prices they warned of did not materialize, and by the end of the quarter, benchmark oil prices were essentially back to where they started pre-war. 

By the end of the quarter, the markets had returned to the pre-invasion conversation that I think we will be revisiting often over the next few years about the scale, scope, and role of AI. The debate earlier this year was about the impact of AI on software, and the extent to which the business models of current software companies will be made obsolete by AI. Tech stocks in general, especially software stocks, were pummeled in the first quarter as a result.  

In the second quarter, things turned around. The tech sector of the S&P 500 increased 31.6% in the quarter and was the only sector to beat the overall market. While many, but not all, software stocks recovered in the spring, the real action was in semiconductor and other communications-equipment manufacturers. Those companies are currently getting an earnings boost from building out the AI capacity that is expected to provide future benefits to AI companies and their customers that use AI. While the two largest semi companies (Nvidia and Broadcom) were up only in the 20-25% range during the quarter, the next three largest (Micron, Advanced Micro Devices, and Intel) were each up approximately 200% to 260%!  

Despite the run these and other tech stocks had during the quarter, bulls still see plenty of room for growth. For example, according to index data on The Wall Street Journal’s website at the end of the quarter, the average price-to-earnings ratio, the main measure of stock valuation, for the tech-heavy NASDAQ index based on earnings expected over the next 12 months was 26x, while the same measure for the S&P 500 index was 21.5x. Even after all that stock price appreciation in the second quarter, the tech stock index’s valuation is not that different from that of the overall market.  

Bears, however, can also point to valuation. As we’ve mentioned in previous Outlook reports, the Shiller PE Ratio, also known as the Cyclically Adjusted PE Ratio, is a metric that is used to assess the valuation of the market as a whole, using long-term data. This multiple stood at 41.4x at the end of June, higher than at any point since just past the dot-com bubble peak in July 2000. 

At the same time, the conversation includes fears about the capital-spending commitments that large companies like Microsoft, Oracle, Alphabet, and Meta were making to build their AI offerings. A late June op-ed in The New York Times worried that the spree in AI investment is “starving” the rest of the economy of capital, attention, labor, and materials.

Companies are rethinking “tokenmaxxing,” or spending massively on AI without strategic planning on how to use it. The local backlash to data center construction is growing and starting to have political consequences. And a Gartner poll in June predicted that half of AI job cuts will be reversed by the end of the year.  

At the risk of wasting too much ink and too many pixels on the AI debate, these discussions have implications for other asset classes as well. Interest rates, measured by the 10-year Treasury yield, peaked in late May due to the war with Iran and implications for global energy prices. Before the war began, the consensus view was that the Fed would cut rates several times this year. By the end of the quarter, consensus now expects at least one increase by the end of the year. While energy inflation is expected to rapidly cool, several Fed governors have recently spoken about AI-spending-induced inflation.   

What’s Next? 

The Fed generally increases rates to cool off an economy at risk of overheating into excessive inflation, by increasing borrowing costs. The desired outcome is reduced demand across the board, which should slow inflation. Higher rates generally have a particularly negative implication for long-duration assets, including longer dated bonds and companies with valuations based predominantly on their future (rather than current) earnings, which become less valuable at higher rates. 

With the massive build-out of AI infrastructure underway and accruing costs now, the benefits of AI are still very much in the future. This is true both for the AI companies themselves, like Chat GPT’s parent Open AI and Claude’s Anthropic, as well as for the companies trying desperately to figure out how to use AI to gain competitive advantage, or at least not fall behind.  

In the meantime, leading economic indicators continue to strengthen, and the unemployment rate is stable—pointing to an expanding economy. On the other hand, the Consumer Price Index (CPI) for May increased 4.2% more than in May 2025, and food prices increased 3.1% over that same time period. Consumers paying these prices are feeling stressed. The Conference Board noted the split between consumers and the AI economy in their mid-June outlook, stating, “The good news is that businesses are spending heavily on AI, data centers, and new technology, helping to keep the economy growing, while consumers pull back spending.”   

That balance is one of the main dynamics we are keeping our eyes on. Another is something we alluded to last quarter: the potential silver lining for renewable energy from the war in Iran. A ticker keeping track of Europe’s avoided cost of imported natural gas due to solar generation was up to $20 billion on July 1.

Even the U.S., with an administration actively hostile to renewables, wind, solar, and batteries, set energy supply records in states as diverse as New York, Texas, and California this spring, and solar generation beat coal for the first time nationwide in May.  

As we indicated in the beginning, the market is very dynamic right now, with reasons for both hope and caution. When markets operate within such strong dichotomies, we think that the best course for investors is usually to stick to the long-term plan. We continue to invest for the long term in high-quality companies with solid business models, following our barbell strategy.  

As I write this, the nation is preparing to celebrate its 250^th birthday, in sweltering fashion. This anniversary gives us a moment to pause and recommit ourselves to the founding ideals, including the notion that “all men are created equal.” We can cling to these ideals regardless of the currents we find ourselves adrift in. The last few months and years have been challenging for Americans committed to peace, equity, justice, and sustainability. Our grounding in these values continues to guide every investment decision we make on behalf of our clients. Even in uncertain times, we remain focused on using your financial assets to drive positive change, through proxy voting, shareholder advocacy, and impact investing. I’m proud of the work we’re doing together now more than ever.  

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Liz Levy is responsible for researching publicly traded equities and managing client portfolios, having joined Clean Yield in June 2024. She brings more than 20 years of experience in Sustainable Investing. She is a Chartered Financial Analyst and is passionate about aligning investment portfolios with values, with deep experience in managing divested, fossil fuel-free, and clean energy investments.