Second Quarter 2026 Review and Third Quarter 2026 Economic and Market Outlook

The end of the Iran conflict and falling energy prices should allow resilient US growth, AI investment and corporate earnings to support markets, although inflation and fiscal risks limit the upside.

• The Strait of Hormuz closure initially created a 20-million-barrel-per-day supply gap and pushed oil above $100 per barrel, but pipeline rerouting, inventory drawdowns and a roughly 50% fall in China’s imports restored supply; oil ended the quarter near $70 and strait traffic recovered to about half of prewar levels.
• US growth remained resilient: GDP expanded at a 2% annual rate in Q1, Atlanta Fed GDPNow indicated 2.5% for Q2, AI-related equipment and intellectual-property investment generated more than half of Q1 GDP growth, and three employment reports averaged 188,000 jobs per month with unemployment at 4.3%.
• Energy drove US headline CPI from 2.4% in January to 4.2% year over year in May, while gasoline prices rose 41%; core CPI remained at 2.9% and core goods prices fell, suggesting limited underlying tariff pressure.
• Markets repriced toward tighter policy after Kevin Warsh became Fed chair: futures moved from pricing several 2026 cuts to an 83% probability of at least one hike, while the S&P 500 gained 15% in Q2 and earnings rose 29% year over year.
• Cerity Partners expects US technology investment and AI adoption to remain the main growth engine, Europe to grow around 1.0% over the next 12 months, China around 4.5% in 2026 and Japan to miss its 1.0% growth target; it nevertheless sees no Fed rate change in 2026 as the most likely outcome if inflation resumes falling toward 2%.

Takeaway: Investors should favor exposure to the continuing AI capital-spending cycle while recognizing that energy shocks, persistent inflation, large fiscal deficits and uncertain central-bank policy could produce higher volatility and limit bond-market gains.