Good morning investors, and happy first day of the second half.
We closed the books on a genuinely strong first six months yesterday, with all three major averages rallying to finish June on a high note. The S&P gained 0.8% to end the half up 9.6%, the Nasdaq jumped 1.5% to close up 12.8%, and the Dow added 0.3% for an 8.9% first-half gain, its best since 2021. The most impressive number is the small cap Russell 2000, which surged nearly 22% for its best first half performance since 1991. That single statistic captures the whole character of this market better than any index headline. If you go back to my 2026 preview, I titled it "The Year of the Small Cap".
Futures have slipped this morning as the new month opens, with the Dow off 170 points and the S&P and Nasdaq both down around 0.3%. The calendar is busy despite the holiday shortened week, with ADP private payrolls, Challenger layoffs, and ISM manufacturing all due today ahead of Thursday's jobs report. Tesla deliveries could land today as well. The most important event, though, may be Kevin Warsh's first public appearance since his debut meeting, and I will come to why that matters.
The First Half Was Won by the Forgotten Corners
The story of this first half is not the total return, impressive as it was, it is how the market got there. The S&P climbed 9.6% without any help from its largest constituents, survived a war induced near correction, and leaned on the forgotten corners of the market to do the heavy lifting. The Magnificent Seven as a group finished the half negative on the year, which means the index accelerated despite an absence of leadership at the very top. That is the opposite of how the last stage of this bull market unfolded, and to my eye it makes the foundation considerably sturdier.
The breadth data underneath is remarkable. The Dow logged its best first half since 2021, small caps their best since 1991, and the equal-weight and broad-market measures outran the megacap titans by a wide margin. I have written repeatedly about why I weigh breadth so heavily, and this is the fullest expression of it yet. Any rally that does not depend solely on a handful of mega cap technology names is a better long term bet, and the textbook broadening we have watched all year is a promising sign for a prolonged bull market rather than a fragile one. Bull markets rarely end by widening out this dramatically. They end by narrowing to a few names, and we have been watching the exact opposite.
I would be honest about the risk on the other side of this. The rotation that defined the first half could revert to old habits, with megacaps reclaiming the top of the food chain, and a Fed hike or a fresh geopolitical shock could trigger a reversal in the rate-sensitive small caps and cyclicals that have run so hard. That said, breadth this wide rarely unwinds quickly, and broad strength like this rarely marks the end of a bull market.
The Magnificent Seven's Rough Month, and Where I See Value
The flip side of the broadening is the pain at the top, and it has been real. The Magnificent Seven shed roughly $2.3 trillion in market value during June as investors reassessed the sheer scale of AI infrastructure spending. Microsoft fell 20% on the month and Nvidia around 13%, with Apple and Amazon each off about 8%. The names that carried this market for three years became its anchor, as the group grappled with a narrative shift from asset light cash machines into balance-sheet-heavy spenders financing data centers partly with debt.
I see real value emerging in the Magnificent Seven right now. These stocks do not stay unloved forever, and the very reasons they sold off strike me as the seeds of the next opportunity rather than evidence of broken businesses. The market is temporarily confused about how to value the capex, waiting for second quarter earnings in July to prove the spending translates into returns. That confusion is exactly where mispricings live. When the most dominant, most profitable franchises in the world go on sale because investors are unsure how to model their AI investment, that tends to be a moment to lean toward rather than away from. The eventual reframing, that this balance sheet becomes a workforce deployed to generate returns and ultimately a moat, has not yet taken hold, and transitions like that are where patient capital is rewarded.
I hold this with balance, since I still expect a volatile summer with big swings in both directions, but when a group this dominant is this washed out, I would rather be a measured buyer of quality into the weakness than a seller into it.
The Chips Keep Running, and the Caution That Comes With It
The divergence within technology remains the defining split. While the megacap titans sagged, the semiconductors kept powering higher. The Philadelphia Semiconductor Index rose around 6% in June and has climbed more than 90% on the year, against a 3.4% decline for the Magnificent Seven. The scale of the outperformance is historic. The chip index has now beaten the S&P by roughly 85 percentage points year to date, on pace for the best half-year outperformance ever, exceeding even the dot-com peak of 2000. Micron, up around 300% on the year, has been the single largest contributor to the entire S&P's gains, and a record chip rally added some $2 trillion in combined market value to Micron, Intel, and AMD in the second quarter alone.
I want to be measured here rather than simply cheer the run. Bespoke's Paul Hickey put it sensibly, that over the long term the semiconductors remain the leadership of this AI bull market, but they have gotten a little extended and this may be a spot to take a breather rather than press aggressively. I agree with that framing. My conviction in the structural memory story is intact after Micron's blowout, yet a group that has outperformed by 85 points in six months is due for consolidation, and I would rather add on weakness than chase strength at these levels. That is the same patience I have counseled on Micron specifically. The theme is right for the long haul but the entry point matters.
It is also worth noting the international dimension, because the AI trade was never just a US story. Emerging market technology stocks were actually the best performing sector globally in the first half, up more than 90%, with European tech up nearly 45%, both outpacing the US. The buildout is powering markets across continents, which is part of why I view it as structural rather than a narrow momentum trade.
Watching Warsh Today
The event I am most focused on is Warsh's appearance on an ECB panel, his first public remarks since taking the chair. Anyone expecting a big signal will likely be disappointed, since quieting the constant stream of Fed communication is one of his stated goals. Still, there may be tea leaves to read on how he thinks about inflation and the current economy. Rather than the old forward guidance, we might get what one reporter aptly called framework guidance, a sense of how he reasons rather than where he thinks rates are headed.
This matters enormously for my differentiated view, which I have laid out in recent editions. My call is that Warsh tightens through the balance sheet rather than the funds rate, a path far gentler on the small-cap and cyclical recovery that drove the first half. The consensus has crowded onto the rate hike side, pricing 75 basis points by year end. I am betting on the footprint lever instead. Today is a chance, however subtle, to hear how the new chairman frames the inflation problem against his stated belief in AI driven productivity gains. I will be listening for framework, not fireworks.
The labor data leading into Thursday's jobs report feeds directly into this. After JOLTS showed stronger-than-expected openings, today's ADP and Challenger numbers will help gauge whether the labor market is heating up in a way that hardens the hawkish case or cooling in a way that gives Warsh room. It is a delicate read, and the whole week builds toward Thursday's payrolls print, which lands a day early before the Fourth.
Oil Closes a Brutal Month, but the Peace Stays Fragile
Crude finished a punishing month, with Brent down roughly 21% in June, its worst month since March 2020, closing near $73, and WTI down more than 20% to around $69. The collapse in the war premium has been faster than almost anyone expected, and it remains the quiet tailwind cushioning the consumer and the inflation picture as we enter the second half.
I would not mistake the price action for a resolved situation, though, and this is important. As ING put it well, the market is treating a temporary ceasefire as a permanent deal, and that is clearly not the case. The weekend's flare-up, with Iranian strikes, US airstrikes in response, and Trump's annihilation threat, gave way to another fragile pause, and the messaging around supposed talks in Qatar has been contradictory, with Iran denying any meeting was scheduled even as US envoys arrived in Doha. Reaching a permanent deal that tackles the nuclear issue within the 60-day window would be very optimistic. The base case remains resolution, driven by the political incentive to end it before the midterms, but the road there keeps delivering exactly these tremors, and cheap energy assets offer protection if one turns serious.
A Note on Gold
The gold picture turned more mixed this week, and I want to address it honestly since I have been constructive. Global gold ETFs posted their largest weekly dollar outflow on record last week, with the big US fund shedding $2 billion. That is real near term pressure, driven by the prospect of Fed hikes lifting the opportunity cost of holding a non-yielding asset. Set against that, the structural demand from central banks remains extraordinary, with a record 90% of them citing gold's crisis performance as a key reason to hold it, alongside its roles as an inflation hedge and portfolio diversifier. I continue to view gold as a worthwhile long-term holding for exactly those diversifying qualities, particularly with M2 money supply surging to a fresh record and rising $698 billion year to date, the largest such increase in five years. Rapid money supply growth is precisely the backdrop that has historically supported hard assets. The ETF outflows are a genuine headwind I am watching, but they do not change the long term case, and I treat the weakness as a reset rather than a reversal.
The Seasonal Tailwind
One constructive piece of context as we turn to July, and credit to Ryan Detrick, CMT for the data. July has been higher for the S&P eleven years in a row, and thanks to that streak, no month has a better average return over the past twenty years. Beyond the calendar, Detrick notes that when the S&P is up between 5% and 10% at the midpoint of the year, as it is now at roughly 9.6%, the rest of the year has historically been quite good, with the worst outcome being essentially flat in 2011. A large decline from here would be genuinely rare.
I never position on seasonality alone, but it fits my broader read. The first half broadened out impressively, the setup is less top heavy than a year ago, and history favors a market that reaches midyear up this much. Combine that with the earnings strength Micron just confirmed and the structural AI demand powering the global economy, and the weight of evidence points higher into year end, even accounting for a bumpy summer.
Final Thought
The first half closes with the central lesson intact and, if anything, strengthened. This was a market of earnings and breadth, where the index climbed on the backs of the forgotten corners while the megacap titans rested, and where a war scare and an AI spending panic both got absorbed without breaking the trend. Small caps had their best first half in 35 years, the Magnificent Seven finished negative, and the market rose anyway. That is textbook broadening, and it is the healthiest possible foundation for a durable bull.
My posture into the second half holds. I favor the contracted side of the AI build and profitable, domestically driven cyclicals ahead of a Q4 backdrop I believe is stronger than the one the market is bracing for, and I would rather let the extended semis come to me on weakness than chase them here. Where I am adding conviction is the Magnificent Seven, where a brutal month of de-positioning has opened up real value in franchises that will not stay unloved forever. I expect a volatile summer with big swings like the ones we have seen, and I would treat any extension of the recent pullback as the healthy, long flagged summer reset rather than evidence anything has broken.
Watch Warsh today for framework rather than fireworks, and watch Thursday's jobs report above all. Enjoy the short week with your families ahead of the Fourth. Stay invested, stay disciplined, and if the recent volatility has you wondering whether your portfolio is built around your goals rather than the headlines, that is the conversation I would happy to have with you.
Best regards,
Dan Sheehan [email protected]
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Market Pulse with Dan Sheehan is a personal market commentary newsletter and is independent from my employer. The content is provided for informational and educational purposes only and reflects my views as of the publication date, which may change without notice. Nothing contained herein should be construed as personalized investment, legal, tax, or financial advice, or as a recommendation to buy or sell any security. Any positions discussed represent my own views and may not be suitable for every reader's objectives, financial situation, or risk tolerance. Information is derived from publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Readers should conduct their own research and consult their own professional advisers before making financial decisions.