Market Leadership Broadens  
with Adam Phillips, Managing Director, Investments 

As we reach the halfway point of 2026, one of the biggest stories in the market isn't simply that stocks have moved higher. It's who has been leading the way. While the S&P 500 has delivered strong gains during the first six months of the year, market leadership has broadened well beyond the handful of technology companies that have dominated returns in recent years.

For much of the past two years, the "Magnificent Seven" have driven a significant portion of the market's performance, fueled largely by enthusiasm surrounding artificial intelligence. Together, these companies now represent roughly one-third of the S&P 500 by market value. This year, however, the group has underperformed the broader market, prompting some investors to jokingly refer to them as the "Lag Seven."

Through June 26, the S&P 500 was up approximately 8% for the year, while the second quarter was on pace to become the index's strongest quarter since 2020, gaining roughly 12%. Even more encouraging, those returns have been driven by a much wider range of companies instead of a small group of mega-cap technology stocks.

The broader participation extends beyond large-cap U.S. stocks. The equal-weighted S&P 500, which gives every company the same weighting regardless of size, has gained about 12% this year. International developed markets have also posted strong returns, while emerging markets and small-cap stocks have each climbed more than 20%, leading major asset classes through the first half of the year.

This shift reinforces one of the core principles of long-term investing: diversification. Market leadership changes over time, and today's strongest performers are not always tomorrow's leaders. Maintaining a diversified portfolio helps investors participate in opportunities across different sectors, company sizes, and regions as leadership evolves.

The market's resilience has been particularly noteworthy given the challenges investors have faced this year. Geopolitical tensions in the Middle East, concerns about inflation, and changing expectations for Federal Reserve policy have all created uncertainty. Earlier in the year, many investors anticipated multiple interest rate cuts. More recently, some have begun discussing the possibility that the Fed's next move could instead be a rate hike if inflation pressures persist.

Looking ahead to the second half of 2026, investors will continue monitoring inflation, interest rates, geopolitical developments, and the upcoming midterm elections. While uncertainty is likely to remain, the first half of the year has demonstrated that strong market performance does not have to rely on just a handful of companies.

Maintaining a disciplined, diversified investment strategy remains one of the most effective ways to navigate changing market conditions.

 Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA^®), a CERTIFIED FINANCIAL PLANNER™ (CFP^®), and has been included on the Forbes NextGen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio. 

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Video Transcript: 

Adam Phillips:

Welcome back to the market update. Now, we're almost at the halfway point for the year, so I thought this would be a great opportunity to take a look back at the first six months of twenty twenty-six and see how equity performance has been doing. Now, I should mention we're recording this on Monday, June twenty-ninth.

I feel that's important because we're not quite at the end of the quarter yet, and things move very quickly these days, as we know. So let's take a look at performance. And I, I think what's really important for the first six months of this year is not just that stocks are higher, but who's been actually driving the move.

And for so long over the last couple of years, it's been all about technology. And even looking more specifically than broad technology, it's been about a handful of companies. We've been calling them The Magnificent Seven. These have been the high-flyers that have primarily been the source of leadership for broad equities over the last couple of years, contributing to broad market returns and seeing their valuations swell.

All of these companies have valuations well over a trillion dollars and have been moving higher and higher in recent years because they are the primary beneficiaries and participants in the AI trade, or at least this first phase of the AI trade. So what's been really interesting this year is these companies, the Mag Seven, which has grown to become about a third of the overall index in terms of weighting and contribution to the S&P 500, the Mag Seven's actually become, I think, what many are calling the Lag Seven.

They've been underperforming the market. We've seen this really big rotation in the first six months of the year. Now looking at index returns, the S&P 500 through last Friday, so June twenty-six, but let's just call it for the first six months of the year, is up about eight percent. That's great.

For six months, that is a very, very strong return. And I think what's even more impressive is if you look at the second quarter performance so far with just a few days left in the second quarter, we're looking at the best quarterly performance for the S&P 500 since 2020. So S&P 500 up about twelve percent over the last three months.

So very strong performance. And it's been strong despite the fact that The Magnificent Seven as a group, as I mentioned, which accounts for about a third of the index in terms of weighting, has actually lagged. It's down about five percent. So that means we've seen broader leadership. We've seen more companies actually move higher despite the weakness in those handful of larger names, the Mag Seven.

So that's what's really impressive here. Let's just look at some of the other indexes that we keep an eye on So from an equal-weighted standpoint, meaning if we don't look at the size of the companies and really put all five hundred members of the S&P 500 on a level playing field and give them all an equal weighting, the equal-weighted S&P 500 is up about twelve percent so far this year.

Now, if we look outside the US, international developed stocks are up close to nine percent for the year, so marginally outperforming the S&P 500. And leading the way are emerging market stocks and small cap stocks, up over twenty percent each so far this year. I think it's been great that we've seen this kind of broadening out, and frankly, I love to see it because for a while there, a lot of us found ourselves defending why diversification still makes sense. And one of the things that we've talked about, both in these market updates and in one-on-one conversations with clients, is that leadership changes over time. Today's winners could be tomorrow's losers, and you can't time these things perfectly, which is why you don't want to fall in love with your holdings.

You want to always maintain diversification. That's what we've been doing in our portfolios, and so we're certainly happy to see this broadening out in terms of performance. But whether you're invested in the S&P 500 or elsewhere in the markets and have equity exposure beyond just large-cap US stocks, I think what's really impressive is that, across the board, the strong performance has come in the face of geopolitical headwinds.

We know that we were faced with the war in Iran, which is still... Things are trending in the right direction, but we're still in a very delicate situation there. But the two sides are talking, and progress is certainly a good thing, and it's a good starting point towards a resolution. But because of that, we've seen an acceleration in inflationary pressures, and that's led to talk about whether the Federal Reserve's next move is going to be a rate hike rather than a rate cut, which many of us expected at the beginning of the year.

So performance has held up, and it's broadened out over the last several months despite these headwinds and the risks to the market. This is going to be really interesting as we turn the page to the second quarter and see how these different stories play out. We'll also be faced with the midterm election here soon, which, normally in a midterm election year, we start talking about well before the beginning of the second quarter.

But I think just because of everything else going on, it's kind of been moved to the side. But I think that'll come into focus here as we approach the midterms in the second half of the year. I'll leave it there for right now. I'll look forward to catching up with you next week.

But as always, if you have any questions, please feel free to reach out to your financial advisor.