The ceasefire from earlier this spring didn't hold in July. Renewed conflict between the U.S. and Iran resurfaced the same headlines and concerns from earlier in the year, as uncertainty around the Strait of Hormuz once again raised the risk of reduced oil supply.

Stocks staged a strong recovery in Q2, with the S&P 500 gaining +15% and finishing near record highs. The Middle East conflict and oil shock that started in Q1 continued for most of Q2, but oil prices fell as the two sides worked toward a ceasefire agreement. Meanwhile, investors’ enthusiasm for artificial intelligence (AI) stocks returned, fueling a rally in semiconductor stocks. As companies reported strong Q1 earnings, the gains broadened beyond technology to include mid-and small-cap stocks. 

Back-to-back ceasefires, first between the U.S. and Iran on April 7 and then between Israel and Lebanon on April 16, changed the market's outlook. The agreements removed the worst-case scenario, and the reversal was immediate across markets. The S&P 500 erased all its March losses and went on to set a new all-time high by month-end. The Dow surged over 1,300 points the day the U.S.-Iran ceasefire took effect, its best day in a year. The Nasdaq Index gained nearly +16% during the month, driven by a historic semiconductor rally, and the Russell 2000 small-cap index gained +9.8% and set its own record. The recovery also reached beyond stocks. Credit spreads, which reflect how concerned the bond market is about corporate borrowers, reversed three months of widening in four weeks, and market uncertainty, as measured by the VIX Index, fell to pre-conflict levels.

The rotation away from mega-cap tech stocks that started in January extended into February. While the S&P 500 traded lower, the average stock, as measured by the equal-weighted index, gained over +3%. The rotation was broad-based: small caps outperformed large caps, value beat growth, seven of eleven sectors beat the S&P 500, and international stocks outpaced U.S. stocks.