Fidelity Managed FidFolios^®

The Big Picture

Global markets delivered positive performance during the second quarter, supported by improving investor sentiment and resilient economies.¹ Reduced tensions in the Middle East helped lower oil prices and decrease uncertainty around the outlook for global economic growth. As a result, both U.S. and international stock markets experienced positive returns over the quarter, despite some market volatility in June. Corporate earnings were a key source of stock market support. First-quarter earnings came in exceptionally strong, at almost double the typical annual earnings growth rate.² Bond markets had a decent quarter, as broad market bonds generated modest gains despite higher interest rates.³ Meanwhile, the U.S. Federal Reserve (Fed) left interest rates unchanged and reaffirmed its commitment to combating inflation. Inflation climbed to 4.1%, more than double the Fed’s 2.0% target.⁴ The Fed’s stance has likely tempered market expectations for additional interest rate cuts for the rest of 2026.

Looking ahead

The global economic environment remains constructive for investors. Market expectations for robust second-quarter corporate earnings growth may continue to support this outlook. Additionally, economic growth has largely been positive around the world despite uncertainty around oil prices. At the same time, periods of volatility are likely, particularly in areas of the market where valuations remain elevated (i.e. expensive). These areas may be more sensitive to unexpected developments in earnings or economic growth.

DID YOU KNOW?

The 2026 FIFA World Cup is estimated to have been the largest sporting event in history. A FIFA-commissioned economic study projected that the sporting event created nearly 824,000 new jobs globally and generated approximately $40.9 billion in global GDP.⁵

The following investment types discussed here are for general informational purposes. All asset class categories referenced may not be represented within your specific strategy.

U.S. Stocks⁶

15.7% QTR

Healthy corporate earnings fueled strong U.S. stock market performance.

U.S. stocks reported stellar earnings for the first quarter with the outlook for second quarter looking just as strong.⁷ Elevated earnings, plus a solid outlook for the future, combined with easing tensions in the Middle East supported U.S. stock returns.

Small company stocks returned an impressive 21.5%, outperforming large company stocks, which returned 15.1%.⁸ Small company stocks experienced healthy returns due to low (i.e. inexpensive) valuations at the start of the quarter. However, mid-sized company stocks lagged their larger counterparts.⁹ Mid-sized stocks underperformed because they lack the information technology stocks that make up a formidable component of the large company stock space. Growth stocks outpaced value stocks as easing Middle East tensions caused markets to shift their attention from inflation and interest rates toward a renewed focus on earnings growth.¹⁰

At the sector level, information technology, communication services, and consumer discretionary sectors all benefited from earnings growth and falling oil prices.¹¹ Meanwhile, energy stocks lagged due to falling oil prices. The utilities and consumer staples sectors also lagged other sectors as a result of less robust earnings forecasts.

Declining energy and precious metal prices during the quarter caused commodities to drop by 8.1%.¹² This overall drop in commodities occurred despite rising industrial metal prices (e.g. copper). Real estate investments rose 10.7%, an impressive quarter but still lagging the broader stock market as the Fed appeared less likely to cut interest rates (real estate stocks have historically performed well when interest rates have declined).¹³

Struggling energy, utilities, and consumer staples sectors caused dividend-paying stocks to have a challenging quarter. Additionally, dividend-paying stocks tend to lag the broader market in periods when investor enthusiasm is concentrated in high-growth areas such as information technology. This was the case last quarter when AI- and technology-driven companies helped propel the S&P 500 Index to positive returns of 15.2%.

International Stocks¹⁴

14.6% QTR

International stocks delivered strong returns, with emerging market stocks outperforming both international developed market and U.S. stocks.

Easing tensions in the Middle East helped create an environment for positive international stock returns. Looking ahead, earnings and economic growth may support further stock rallies. Exposure to international stocks may help diversify against U.S. stock volatility, particularly through international developed market stocks, which tend to have less exposure to volatile information technology stocks.

International developed markets produced positive returns of 11.0%, but lagged both U.S. stocks and emerging market stocks.¹⁵ Japanese and German stocks led international developed markets with strong economic growth forecasts.¹⁶ Meanwhile, the U.K. lagged due to a middling economic growth outlook. Canadian stocks returned 6.1%, also lagging other developed market countries.¹⁷ Canadian stocks came under pressure as falling oil prices put downward pressure on the energy sector, a major component of the country's stock market.

Emerging markets had a stellar quarter, returning 24.0% to soar past U.S. stocks.¹⁸ Growth within the information technology sector fueled this rally in emerging market stocks, led by South Korea and Taiwan.¹⁹ Brazilian stocks fell as oil prices dropped. Meanwhile, Chinese stocks were nearly flat as the country’s economic outlook remained tepid.

Bonds²⁰

0.7% QTR

Bond markets delivered moderate returns in the second quarter.

Bonds faced a challenging environment during the quarter. Interest rates rose, putting downward pressure on bond prices, while the Fed signaled that interest rates will likely remain steady for the remainder of the year. Nevertheless, investment-grade bonds experienced modest gains despite these challenges, due to healthy bond yields. Tight credit spreads signaled lower default risk and positive fundamentals for investment-grade corporate bonds, offsetting the difficult interest rate environment.²¹ Investment-grade corporate bonds returned 1.4%,²² substantially outperforming U.S. Treasuries, which ended the quarter at 0.3%.²³ The yield curve flattened as the short-to-intermediate end of the yield curve rose, while the longer end modestly shifted downward. As a result, limited duration and intermediate-term bonds underperformed broad-market investment-grade bonds.²⁴

Overall, municipal bonds returned 2.5%, outpacing other investment-grade bonds.²⁵ Similar to investment-grade bonds, limited duration and intermediate municipal bonds produced positive returns, but underperformed their broad market counterparts, as the municipal bond yield curve flattened.²⁶ Credit fundamentals across municipal bond maturities remained stable and June marked the beginning of the municipal market’s strongest seasonal period. Municipal bonds often experience robust demand in the summer because coupon payments, bond maturities, and reinvestments typically increase during the season while supply tends to remain limited. Additionally, municipal bond issuance and investor demand were healthy during the quarter, supporting strong returns. From a sector perspective, revenue bonds rose by 2.6%, outperforming general obligation (GO) bonds, which returned 2.4%.²⁷ Going forward, municipal bond supply may decline in the second half of the year if interest rates remain high. Within this higher-rate environment, some issuers (e.g. hospitals and higher education) may wait to borrow until after November’s midterm elections when they have more clarity around the potential impact of new government policies.

High-yield bonds outperformed investment-grade bonds, returning 2.5% for the quarter, as the U.S. economic outlook improved with easing tensions in the Middle East.²⁸ TIPS also outperformed other investment-grade bonds, returning 0.9% for the quarter, as inflation remained above the Fed’s long-term target.²⁹

Looking ahead, bond investors may miss out on the potential for rising prices from interest rate cuts, since the Fed seems poised to keep interest rates steady for the remainder of 2026. However, healthy yields may still lead to positive returns for bond investors.³⁰

The following tax management commentary is intended solely for clients whose investment strategy includes tax management.* It provides general insights into tax management within a broad market context and may not reflect the specific opportunities or circumstances of your individual account.

During the second quarter of 2026, U.S. stock market volatility spiked in June following stock rallies in April and May.³¹ Volatility in June was likely driven by markets reassessing their outlooks for the direction of interest rates. Additionally, some investors likely shifted their investments as they took the opportunity to use some profits from strong performers and invest in other parts of the market.

Sectors that provided the most opportunities to harvest tax losses included energy, utilities, and health care. Energy and utilities faced downward pressure from falling oil prices as tensions eased in the Middle East. Meanwhile, health care faced some U.S. federal government policy uncertainty. While market volatility may feel unsettling, harvested losses may generate tax savings for some investors.

In addition to tax-loss harvesting, we seek to enhance after-tax returns through other techniques. For example, within certain strategies, we may invest in municipal bonds that seek to generate interest income free from federal and sometimes state taxes as well. Additionally, we may seek to manage the impact of taxes within client accounts by strategically managing long-term vs. short-term capital gains.

For Additional Information, please view our Quarterly Market Perspective

The foregoing commentary was prepared by Strategic Advisers LLC, a registered investment adviser and a Fidelity Investments company.