From War Shock to Record Rebound: The Best Quarter Since 2020

After a first quarter defined by the Iran war and an energy shock, the second quarter delivered a stunning reversal. As the Strait of Hormuz crisis moved toward de-escalation and coordinated reserve releases pushed oil sharply lower, U.S. equities came roaring back. The S&P 500 gained 14.9% on a price basis (15.2% total return) and the tech-heavy Nasdaq 100 surged 27.7% : both the strongest quarterly performances since the second quarter of 2020. The Nasdaq Composite rose 21.4%, the Russell 2000 21.2%, and the Dow 12.9%. All five major indexes finished the quarter at or near record highs.

The rally was underpinned by fundamentals, not just relief. First-quarter S&P 500 earnings grew a 28.6% year-over-year : the fastest since Q4 2021 : while net profit margins reached a record 14.8% and revenue rose 11.8%. That earnings strength let the market climb even as the largest technology names lagged: the Bloomberg Magnificent 7 finished the first half down 1.7%, while small- and mid-caps led, confirming the broadening that began in Q1.

April & May: Records Fall as Oil Cools

In April the market shrugged off the energy shock entirely. The S&P 500 jumped 10.4% : its best month since November 2020 : to a record 7,209.01 on April 30, powered by blowout results from Alphabet and Caterpillar, while the Nasdaq rose 15.3%. Oil peaked at $112.95 on April 7 before the UAE's exit from OPEC+ and rising supply began to weigh on prices. In May, a record 172-million-barrel coordinated release from the U.S. Strategic Petroleum Reserve and IEA partners sent WTI down 16.9%, and the S&P 500 rose another 5.3% to a fresh record of 7,580.06, led by a 16% jump in Information Technology.

June: Volatility Returns, but Records Hold

June was choppier. A U.S.-Iran agreement to open peace talks, announced June 17, proved fragile as hostilities resumed within days, and a late-month selloff in mega-cap tech dragged the S&P 500 to a 0.95% monthly loss : its only down month of the quarter. Yet breadth stayed healthy: the S&P MidCap 400 and SmallCap 600 each rose more than 3% in June, and the Dow closed at a record 52,319.20 on June 30, its first finish above 52,000, boosted by Alphabet's addition to the index. The quarter also featured the largest IPO in history, SpaceX's June 12 debut, and a Supreme Court ruling on June 30 affirming Federal Reserve independence.

Inflation Heats Up and the Fed Turns Hawkish

The cost of the energy shock showed up in the data. Headline CPI climbed from 3.3% in March to 3.8% in April and 4.2% in May : a three-year high : though core inflation stayed more contained at 2.9%. The Federal Reserve held the funds rate at 3.50-3.75% at both the April and June meetings, but the tone shifted sharply: policymakers erased projected 2026 cuts, and the June dot plot leaned toward a rate hike. By quarter-end the market-implied year-end 2026 rate had risen to 4.0%, up from 3.0% at the start of the year. The 10-year Treasury yield rose to 4.47% and the 2-year to 4.17%.

Havens Unwind as Risk Appetite Returns

The safe-haven trades that defined Q1 reversed hard. Gold fell about 14% for the quarter to roughly $4,040 an ounce, turning negative for the year, as war fears eased. WTI crude tumbled 31% to $70.10. Bitcoin slid about 13%, dropping below $60,000 for the first time since 2024 amid a rotation back into equities. The U.S. dollar firmed modestly (DXY +1.2%) as hawkish Fed expectations supported the currency.

Can the Rally Broaden as the Fed Leans Hawkish?

Markets enter the third quarter at record highs but facing a genuine tension: exceptional earnings and an improving geopolitical backdrop on one side, a hawkish Fed and a three-year-high inflation rate on the other. The durability of the Iran ceasefire and the reopening of the Strait of Hormuz remain the key swing factors for oil and, by extension, inflation and Fed policy. With WTI back near $70, a sustained de-escalation would help inflation fade; renewed conflict would quickly reverse that progress.

Key Catalysts for Q3

Inflation data (mid-July onward): June and July CPI will show whether the energy-driven spike is peaking or seeping into core prices. Cooling oil argues for relief; stubborn core (2.9%) argues for caution.

Fed policy (July 28-29 FOMC): With the dot plot tilted toward a hike and the market pricing a possible move by the fall, the July meeting and Chair Warsh's guidance will set the tone for rates and risk appetite.

Q2 earnings season (mid-July): Consensus calls for roughly 23% year-over-year S&P 500 earnings growth. With the index near 21x forward earnings, results : and guidance on AI spending : will need to justify rich valuations.

Breadth vs. concentration: Small- and mid-caps and value led the first half while the Magnificent 7 lagged. Whether that rotation persists, or mega-cap tech reasserts leadership, will shape the character of any further gains.