After an initial pullback to start the year, the second quarter of 2026 saw equity markets rebound, led by technology stocks and greater excitement for the buildout of Artificial Intelligence (AI) infrastructure. The S&P 500 increased +15.2% for the quarter and is up +10.2% for the year.1 While geopolitical uncertainty around the conflict in the Middle East has persisted, energy prices have moderated, and economic conditions improved during the quarter.
At the onset of hostilities with Iran, global oil prices jumped and peaked at about $126 per barrel (Brent International Benchmark) in early April.2 With an apparent cease fire in place and negotiations under way for a more permanent resolution, oil prices have retreated to about $73 per barrel by quarter end, still above the $60 level to start the year, but down significantly from the peak of the crisis.3 This decline in oil prices is starting to trickle down to refined products such as gasoline. The nationwide average price of a gallon of gas in the U.S. finished the quarter at $3.85, down from its peak of $4.56 in the middle of May, but still higher than $3.00 average prior to the start of the military action against Iran.4
The jump in oil prices has been the primary driver of an increase in the rate of inflation over the last couple of months. The Federal Reserve’s preferred gauge of inflation PCE (Personal Consumption Expenditures) Index had been tracking at +2.9% in the early part of the year, rose to +3.8% in April and +4.1% in May, above the Federal Reserve’s stated target range.5 Meanwhile, the core PCE, which excludes food and energy prices, has increased by a more modest rate from +3.0% in February, to +3.4% in its most recent readings, suggesting that the rise in energy prices has been the primary driver, and that the recent decline in oil prices should moderate subsequent inflation readings.6
With this backdrop, interest rates crept up during the quarter with the benchmark U.S. 10-Year Treasury now yielding 4.42%, up slightly from 4.34% to begin the quarter.7 Kevin Warsh was sworn in as the new Chairman of the Federal Reserve on May 22nd and in his first meeting signaled a more hawkish shift in the direction of the Fed. Warsh eliminated the Fed’s easing bias and suggested the potential for interest rate increases later in the year. Warsh may end up being more hawkish than the administration had initially thought.
On the economic front, despite the headlines and concerns about rising inflation, the broader economy appears to be rebounding. Gross Domestic Product (GDP) growth, which eked out a meager +0.5% in the last quarter of 2025 (largely due to the government shutdown), improved to +1.6% in the first quarter of this year and is currently estimated to top +2.0% growth in the second quarter.8 Similarly, on the employment front, the jobs figures have shown a rebound from the soft results at the end of last year and the unemployment rate remained steady throughout 2026 at around 4.3%.9
Much of the strength of the U.S. economy can be attributed to the heavy investment in AI infrastructure (both the physical infrastructure including semiconductors and data centers, as well as the intellectual property around software and model development). The Bureau of Economic Analysis estimates that about half of the total growth rate in U.S. GDP is being driven by this AI build out.
Not surprisingly, AI-related technology stocks led the equity market performance in the quarter. Year-over-year growth in S&P 500 earnings per share was +28.2% in the quarter, a marked acceleration from +11.2% and +7.4% growth in the prior two quarters.10 The majority of this acceleration was driven by AI-related names. This means that despite the strong stock market performance year-to-date, the valuation level of the S&P 500, as measured by price to earnings multiples, has declined, as earnings growth has outpaced the appreciation in share prices.
Further impacting the markets has been the record levels of capital raised this year both on the debt and equity side. Much of the capital raised is intended to help fund the growth of the AI infrastructure build-out. On the equity side, the excitement was punctuated by the largest Initial Public Offering (IPO) in history for Space Exploration Technologies Corporation, more commonly referred to as SpaceX (SPCX). There is also anticipation that two of the primary AI companies that build advanced Large Language Models (LLM), Anthropic and OpenAI, will be looking to go public and raise capital in the second half of this year. Whether or not these levels of capital raises continue, remain to be seen and could have broader implications for the overall direction of markets.
The question remains, what will be the eventual impact of AI on the broader economy. Economists at Goldman Sachs estimate that long-term there will be a shift in the potential GDP growth of the United States from 1.75% to 2.50%, driven by 1.5% annual productivity improvement.11 The larger concern for many will be the potential impact on the job market. So far analyses have suggested that while overall employment has remained strong, there have been shifts within the job market. A PwC analysis has pointed to a softening in demand for basic knowledge economy workers which include entry level and junior associates such as paralegals, entry-level coders, and copywriters who are being automated by AI agents. This may be part of the reason we have seen more reports of some college students having a harder time finding their first entry-level job. On the other hand, within white collar employment there is increasing demand for more complex, non-routine human capabilities. We are also seeing a boom in the demand for physical labor, particularly within the skilled trades.12
The other aspect of the buildout of AI infrastructure that is drawing a lot of attention and some concern is the increased demand for electricity to power new data centers. After over a decade of flat domestic electricity demand, we have seen an increase in the last couple of years, which has been driving higher prices, and drawing increased criticism, and in some areas protest. With the increase in demand, it is estimated that 350 gigawatts (GW) of net new utility scale electric capacity will be added in the United States over the next 5 years on a current base of 1,250 GW.13 About half of that increased capacity will be driven by data center demand. While the buildout of this capacity is positive for infrastructure spending, higher utility prices squeeze the consumer and raise costs for energy intensive businesses.
We continue to monitor these developments and their impact on the economy and markets and appreciate your continued confidence in Dumont & Blake. As is always the case, we are available to discuss any questions or concerns that you may have.
Dumont & Blake Investment Advisors, LLC
June 30, 2026
1Bloomberg
2Bloomberg
3Bloomberg
4American Automobile Association (AAA)
5Bureau of Economic Analysis
6Bureau of Economic Analysis
7Bloomberg
8Bureau of Economic Analysis and for estimates, the Federal Reserve Banks of Atlanta and Philadelphia
9Bureau of Economic Analysis
10Factset
11Goldman Sachs
12PwC
13Goldman Sachs
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