U.S. stocks just capped a strong first half of 2026 and a robust second quarter as semiconductor shares powered the market rally. The strength in semiconductors provided a major boost to the broader market and reinforced investor confidence in the ongoing AI-driven growth story.
Major Indexes Deliver Strong First-Half Returns
The Dow Jones advanced 8.9% during the first six months of the year, marking its best first-half performance since 2021, when it gained 12.7%. The S&P 500 rose 9.6%, while the Nasdaq outperformed with a gain of more than 12%.
Small-cap stocks also enjoyed a standout period. The Russell 2000 jumped nearly 22%, recording its strongest first-half performance since 1991, as quoted on CNBC.
Volatile Start Gives Way to a Strong Recovery
The first half of the year was marked by significant volatility. Markets reached record highs despite sharp fluctuations in energy prices caused by the Iran conflict and ongoing concerns about whether AI-related spending could remain sustainable.
Inside the Iran War
Following large-scale U.S.-Israel strikes on Iranian military infrastructure in February 2026, the United States and Iran engaged in months of warfare. The conflict severely disrupted global oil routes when Iran moved to block the Strait of Hormuz.
However, by mid-2026, the two nations signaled a ceasefire, bringing active hostilities to a halt and moving toward an extended period of Pakistan-mediated negotiations.
AI Bubble Concerns Doing Rounds
The AI trade has been a winning market theme, but the gains have been relatively narrow, increasing portfolio concentration risk and leaving investors more exposed to drawdowns and volatility in the technology sector.
As per a CNBC article, in June, approximately $2.3 trillion was wiped off the combined market value of the Mag 7 as investors grew increasingly concerned about the sustainability of massive AI infrastructure spending and whether the expected returns would justify the significant capital outlays.
Upbeat Earnings: Key Positive of 1H 2026
Solid corporate earnings remained the key market driver. Total S&P 500 earnings are expected to increase by 23.7% in the June quarter of 2026 from the same period last year, with revenues expected to rise 11.4% year over year.
Note that investor sentiment improved considerably during the second quarter as worries surrounding the AI trade subsided and geopolitical tensions appeared to be moving toward resolution.
The S&P 500 and Nasdaq gained 14.9% and 21.4%, respectively, in Q2, delivering their strongest quarterly performances since the second quarter of 2020. The Dow climbed 12.9%, its best quarter since the final three months of 2022, as quoted on the same CNBC article.
Fed Stays Put, Hints at Hawkish Path Ahead
The Federal Reserve left interest rates unchanged in June for the fourth straight policy meeting, keeping the benchmark federal funds rate in the 3.50%-3.75% range. This meeting was also the first under the new Fed Chair Kevin Warsh.
While the Fed kept rates on hold, its latest projections suggest that policymakers are leaning toward keeping borrowing costs higher for longer. Several officials signaled rate hikes later this year, as quoted on Yahoo Finance.
Alphabet Joins Dow Jones
Alphabet GOOGL officially entered the Dow Jones Industrial Average, earning one of Wall Street's most recognizable blue-chip distinctions in June-end.The addition marks a major milestone for the Dow Jones index, shifting its focus away from traditional telecommunications toward artificial intelligence and other key tech areas (read: Alphabet Joins Dow Jones: ETF Likely to Benefit).
Winning ETF Areas in Focus
Against this backdrop, below we highlight a few winning ETF areas of this year.
Shipping
Breakwave Tanker Shipping ETF BWET – Up 670.2% YTD
The Middle East conflict and the closure of the Strait of Hormuz have disrupted key shipping routes, driving a sharp surge in freight rates. This has strengthened the investment case for BWET.
Semiconductor
Invesco Semiconductors ETF PSI – Up 121.2%
The rise of AI, cloud computing, big data, data centers, the Internet of Things, 5G expansion, smartphone upgrades, and new gadgets has been fueling demand for chips and other semiconductor products.
South Korea
iShares MSCI South Korea ETF EWY – Up 90.8%
South Korean stocks have seen an unprecedented rally in 2026. Driven by the global artificial intelligence boom and heavy international demand for memory chips, the tech-heavy EWY has rallied.
Utilities
Tortoise AI Infrastructure ETF TCAI – Up 77.7%
In 2026, the AI infrastructure market has grown far beyond foundational chipmakers to encompass memory, networking, power management, and physical data center construction.
Gasoline
United States Gasoline Fund LP UGA – Up 68.8%
The fund’s price surged in 2026 due to supply shocks linked to Middle East hostilities, particularly the U.S.-Iran conflict in late winter, which sent wholesale gasoline futures sharply higher. This was further augmented by the start of the summer driving season.
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This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
