Quarter in Review
Equities rallied during the second quarter, driven by expectations of continued earnings growth coupled with positive sentiment resulting from a turn in macro events.
The Russell 3000 Index, a broad measure of the U.S. stock market, rose 15.4% driven primarily by the 21.5% advance in the Russell 2000 Index of U.S. small cap stocks. The Russell 1000 Index, a measure of U.S. large cap stocks, rose 15.1%.
Outside the U.S., the MSCI All Country World Index ex-USA (ACWI x-USA) increased 14.5%, augmented by the 24.1% advance within the MSCI Emerging Markets Index while the MSCI EAFE Index, a measure of foreign developed markets increased 10.8%.
For the quarter, Growth outperformed Value as semiconductor, electronic equipment, and storage companies within the Information Technology surged. Recall the Information Technology sector faded during the first quarter, and investors may have seen this fade as an entry point subsequently bidding up valuations. Year to-date (YTD), the Russell 3000 Index is up 10.9% while ACWI x-USA has advanced 13.7%.
Continued Rise in the Information Technology Sector
A concern has been the expanding weight of the Information Technology sector within broad equity indexes. We looked at the MSCI USA Index overall and its underlying sub-industries. According to FactSet, this sector’s index weight currently stands at 37.4% versus 33.0% a year ago given its YOY return of 39.7%.
Regarding underlying sub-industries, the largest constituent is Semiconductors, whose weight increased to 16.2% from 11.6% a year ago given its 70.8% YOY performance driven by constituent returns associated to Micron Technologies (+838.2% YOY), Intel Corporation (+523.4% YOY), Advanced Micro Devices, Inc. (+309.4% YOY), and Marvell Technology, Inc. (+285.9% YOY).
The largest increase was observed in Semiconductor Materials & Equipment, which rose to a constituent weight of 2.6% from 0.8% a year ago. This sub industry returned 290.7% YOY, given the rise in constituent companies such as Teradyne, Inc. (+439.4% YOY), Lam Research Corporation (+347.6% YOY), Applied Materials, Inc. (+297.9%YOY), and KLA Corporation (+239.0% YOY).
Technology Hardware, Storage & Peripherals became the second-largest constituent industry behind Semiconductors, exhibiting a return of 54.9% YOY as constituents such as Western Digital (+900.8% YOY), and Seagate Technology Holdings PLC (+574.1% YOY) soared over this period.
Systems Software, whose negative return of 20.0% YOY reduced its constituent weight from 8.3% a year ago to 5.5% as companies such as Zscaler, Inc. (-55.0% YOY), ServiceNow, Inc. (-51.7% YOY), Oracle Corporation (-32.3% YOY), and Microsoft (-24.4% YOY) all exhibited declines.
What Next?
One may ask, what is the outlook for equities overall given the scenario and associated returns previously discussed?
Consider earnings growth, revenue growth, and valuation for the MSCI USA Index and certain sub-groups. According to LSEG, analysts project forward year earnings growth for the Index of 24.5%, supplemented by estimated revenue growth of 11.0%. Its projected price-to-earnings growth, or PEG ratio, is 0.7. A PEG ratio of 1 indicates a company is fairly valued, or priced equal to its earnings growth. A PEG below 1 indicates prospective opportunity.
Concerning the Information Technology sector, analysts project earnings growth of 50.8% for this period, supported by revenue growth of 30.1%, with a projected PEG ratio of 0.5. The projected earnings growth for the Semiconductors industry is 108.9%, supported by estimated growth in revenues of 68.0%, with a PEG ratio of 0.3. Recall this sector rebounded aggressively during the second quarter, as investors acknowledged stable to expanding projected revenues and earnings growth
at a discount to current valuation.
Continued Caution
Our process emphasizes quality growth at a reasonable price, which has historically captured attractive risk-adjusted returns. Agility is required in markets like that presented during the first half of 2026, and we remain diligent monitoring macro and company specific events, executing when appropriate to optimize the risk to reward function.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.
This content is provided for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and should not be interpreted as investment, tax, legal, and/or financial planning advice. All investments involve risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.