Key Takeaways:
The S&P 500 closed the second quarter with substantial gains, completing a volatile six-month stretch that saw the index plunge in March on the outbreak of war with Iran before rebounding to new highs on a historic rally in semiconductor stocks.
"The market has effectively priced in a V-shaped recovery from the March selloff, but the question is whether the second half can deliver the same momentum," said Michael Gapen, chief U.S. equity strategist at Bank of America. "The chip trade has been the engine, and it's showing signs of exhaustion at current valuations."
The S&P 500 fell as much as 10% in March after President Donald Trump launched military operations against Iran, triggering a broad risk-asset selloff that pushed the Cboe Volatility Index above 35 for the first time since 2020. The recovery began within weeks as oil prices stabilized and the conflict remained contained, with the index erasing its losses by late April.
The rebound accelerated through May and June, driven by a surge in semiconductor stocks. Chipmakers led all 11 GICS sectors in the quarter, with the Philadelphia Semiconductor Index posting gains of more than 30% from its March low. Nvidia Corp., Advanced Micro Devices Inc. and Broadcom Inc. each added hundreds of billions in market value as demand for artificial intelligence computing infrastructure continued to outpace supply.
Technology and communication services were the top-performing sectors for the quarter, each rising more than 15%. Energy and materials lagged, with the energy sector posting a decline as crude oil prices retreated from post-conflict highs. The S&P 500's advance-decline line showed breadth narrowing in June, with fewer than 40% of index members trading above their 50-day moving average by the final week of the quarter.
The 10-year U.S. Treasury yield fell 12 basis points over the quarter to 4.18%, reflecting expectations that the Federal Reserve may cut rates later this year as economic growth shows signs of cooling. The U.S. dollar index weakened 1.8% over the period, providing a tailwind for multinational earnings but adding to uncertainty around import costs.
Trading volumes on the New York Stock Exchange averaged 11% above the 20-day mean during the quarter's final two weeks, suggesting active repositioning by institutional investors heading into the second half. The VIX closed the quarter near 16, well below its March peak but above the 12-handle that prevailed before the Iran escalation.
The sustainability of the rally hinges on three factors: whether chip earnings due in mid-July can justify valuations that have pushed the sector's forward P/E above 30 times, whether the Fed signals a rate cut at its July 29 meeting, and whether geopolitical risks in the Middle East remain contained. Profit-taking in the first week of July would not be unusual after a quarter of this magnitude, and options market data shows elevated put activity on the S&P 500 at the 5,400 level, suggesting some investors are hedging for a pullback.
This article is for informational purposes only and does not constitute investment advice.
