If someone had told you at the start of the year that global markets would be posting blockbuster returns in the middle of a military conflict with Iran, a shutdown of the critical Strait of Hormuz, and crude oil prices rocketing past $100 a barrel, you probably wouldn’t have believed them.
Yet, against all odds, here we are. The S&P 500 just wrapped up the second quarter of 2026 with an explosive 15% return. To put that into perspective, this isn’t just a good quarter—it is the single best second-quarter return in a midterm election year since 1936, and the 12th best overall quarter for the index since 1950! So, why is Wall Street shrugging off major geopolitical chaos? The answer boils down to corporate earnings and a massive structural shift. The aggressive capital spending on Artificial Intelligence is fueling a historic industrial build-out, essentially rewriting the economic playbook and powering the stock market higher.
Earnings Growth is Holding the Line
As we head deeper into the summer, corporate fundamentals are proving to be remarkably resilient. First-quarter year-over-year earnings growth for the S&P 500 clocked in at a staggering 28%, blowing past practically all analyst estimates.
Now, as we enter the second-quarter earnings season, corporate leadership remains uncharacteristically optimistic. Data from FactSet shows that estimated earnings for the S&P 500 are actually higher today than they were when the quarter began. For the second consecutive quarter, overall corporate earnings growth is expected to top 20%. We’ll get a taste of this corporate resilience later this week when consumer giant PepsiCo (PEP) and Delta Air Lines (DAL) report their numbers, right before the major banks officially kick off the floodgates on July 14.
The Job Market is Cooling (And What It Means for the Fed)
While the stock market looks red-hot, the underlying labor market tells a much quieter story. Recent government surveys reveal that the employment picture is softening faster than a lot of investors realize.
First, the Household Survey—which monitors civilian employment, including small businesses and the self-employed—has been steadily ticking downward all year, falling from 170.5 million workers in January down to 169.4 million in June. Second, the closely watched Nonfarm Payrolls report for June completely missed the mark, adding just 57,000 jobs. Leisure and hospitality took a notable hit, losing 61,000 positions due to weak seasonal hiring. While the formal unemployment rate fell slightly to 4.2%, it happened mostly because people are leaving the workforce altogether. The Silver Lining for Investors: This cooler employment backdrop takes a massive amount of pressure off Federal Reserve Chair Kevin Warsh and the FOMC. The consensus expectation was that the Fed would feel forced to keep raising interest rates, but this softer data completely challenges that view. Keep an eye out for the release of the June FOMC meeting minutes this Wednesday for more clues on where policy is headed.
Defense Stocks Are Rocketing Higher
Unfortunately, global friction is a secular reality, and it’s driving a multi-year investment opportunity in defense stocks. Allied and U.S. defense spending is surging past $1.0 trillion annually as nations rush to replenish munitions sent to Ukraine, respond to tensions with Iran, and prepare for potential disruptions around Taiwan.
The smart money is moving fast. Highlighting this trend, JPMorgan Chase recently made waves by launching an initiative to invest $10 billion of its own capital directly into national security and defense firms. There is also an innovation angle here: modern defense is moving toward cheaper, AI-enabled, autonomous systems (pioneered by private innovators like Anduril). This allows for rapid, scalable production that traditional, multi-billion-dollar military hardware platforms simply can’t compete with. While headline news will cause short-term volatility, defense remains a highly resilient, structural theme for diversified portfolios.
Energy Volatility and the International Breakout
On the commodity front, oil prices saw a sharp relief drop this past week as diplomatic de-escalation between the U.S. and Iran eased supply anxieties. Commercial shipping traffic has safely resumed through the critical Strait of Hormuz chokepoint, instantly lowering the geopolitical risk premium on crude oil.
Cheaper oil is an instant win for consumers at the pump, serves as an inflation cooler, and provides an immediate boost to transportation, airline, and shipping stocks. While the price drop temporarily dented Energy sector stock prices, the sector’s forward earnings forecasts are still incredibly strong, meaning we view this pullback as a textbook buying opportunity.
Meanwhile, the international story keeps getting better. The STOXX Europe 600 broke out to new all-time record highs last week, locking in an 8.0% gain for the first half of the year. This confirms our view that international markets entered a fresh secular bull market last year, and we continue to advise diversifying outside of purely U.S. equities.
Reading the Market’s Tactical Compass
If we look under the hood of the market using price momentum, Information Technology remains firmly in first place, followed closely by Industrials and Healthcare. On the flip side, Consumer Discretionary and Utilities are lagging at the bottom of the pile.
According to our tactical model, things are looking highly stretched. Technology is heavily overbought right now, which means its breakneck pace of gains will likely start to normalize. Conversely, sectors like Energy, Utilities, Consumer Staples, and Materials are deeply oversold.
Because this dramatic overbought/oversold imbalance is still working itself out, the stage is set for aggressive, volatile sector rotations. Don’t be surprised to see capital suddenly shift out of high-flying tech and rush into these battered, unloved sectors in the weeks ahead.
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Sanctuary makes no representation as to the accuracy or completeness of information contained herein. Any forward-looking statements are based on assumptions, may not materialize, and are subject to change without notice. The information is based upon data available to the public and is not an offer to sell or solicitation of offers to buy any securities mentioned herein. Any investment discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Investments are subject to risk, including but not limited to market and interest rate fluctuations. Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request.