After stellar Q2 gains, US equities may face a tougher road in Q3

Strong Q2 gains give way to signs of deceleration

With United States (US) markets closed on Friday for the Juneteenth National Independence Day holiday, US equity markets enter the home straight for the second quarter (Q2) in solid shape, albeit with some clear deceleration in June after the strong gains seen in April and May.

For the month of June, the  Nasdaq is up a modest 0.24% month-to-date (MTD) but has delivered an impressive 28% gain quarter-to-date (QTD). The S&P 500 is down 1.05% MTD, yet still sits 14.89% higher QTD, while the Dow Jones has added 553 points (+1.04% MTD) and 11.28% QTD.

Key  risks

Looking ahead, the biggest risks to these stellar returns and any continued outperformance by US equities into the third quarter (Q3) appear to stem from three main sources.

1. A more hawkish Fed

Last week’s Federal Open Market Committee (FOMC) meeting delivered a hawkish surprise under new Chair Kevin Warsh. The updated dot plot showed nine officials now expecting at least one rate hike by the end of 2026, while the statement removed previous easing language. Warsh was notably direct in his press conference, repeatedly stressing ‘price stability’ and signalling that he wants markets to react to the data rather than front-run policy. Markets have responded aggressively, pricing in a full 25 basis point (bp) hike by September and two hikes by March 2027.

2. Ongoing fragility in the Middle East

High-level talks between the US and Iran in Switzerland over the weekend appear to have produced some progress, with both sides agreeing to establish a high-level committee.

This committee will coordinate working groups focused on nuclear issues, sanctions relief, and a monitoring and dispute resolution mechanism to support the implementation of the Memorandum of Understanding (MoU).

The two sides have also committed to forming a dedicated deconfliction group aimed at addressing hostilities between Israel and Lebanese Hezbollah. However, whether these steps will deliver meaningful results on the ground remains to be seen, particularly in Southern Lebanon where both Israel and Hezbollah are seemingly intent on continuing their struggle.

3. A higher bar for technology stocks

While the sector has performed exceptionally well, valuations have become stretched and the bar is now materially higher than it was a few months ago. Questions around capital expenditure (capex) and returns on artificial intelligence (AI) spending remain unanswered. While names like Intel and Micron are hitting fresh record highs, the Magnificent Seven (Mag 7) has lost considerable momentum in recent weeks. Amazon and Nvidia are trading around 12% below their recent peaks, while Microsoft and Meta Platforms sit not far above their March lows. Whether the Nasdaq 100 can push decisively to new highs without stronger leadership from the Mag 7 remains to be seen.

US: core PCE price index

Date: Thursday, 25 June at 10.30pm AEST

Last month, the Federal Reserve’s (Fed) preferred inflation gauge, core personal consumption expenditures (PCE), rose 0.2% month-on-month (MoM) in April, lifting the annual rate to 3.3% from 3.2%. That marked the highest core reading since late 2023 and remains well above the Fed’s 2% target.

Given last week’s hawkish surprise at the FOMC, Thursday’s May core PCE release will carry added weight. Markets are expecting the annual rate to edge higher to 3.4%. While energy prices have fallen sharply in recent weeks, a firmer labour market and resilient activity data should provide some offset. A hotter-than-expected print would reinforce the Fed’s hawkish pivot and add to expectations of tighter policy later this year, while a softer reading would help temper rate hike concerns.

Core PCE price index annual change chart

Nasdaq 100 technical analysis

From its late-March low of 22,841, the Nasdaq 100 launched a jaw-dropping 35% rally in just over nine weeks to reach a record high of 30,762 in early June. The rally was in line with our bullish calls, although it did hit the 30,000 target some six months earlier than we were expecting. In that context, the 8.3% pullback to the recent 28,196 low was hardly surprising.

Looking ahead, as long as the Nasdaq 100 holds above support at 28,000ish, the door remains open for a retest and break of the 30,762 record high, before the next upside target at around 32,000. However, a sustained break below the 28,000ish support area would open the door to a deeper correction into the 27,200 – 27,000 region.

Nasdaq 100 daily candlestick chart

Dow Jones technical analysis

From its late-March low of 45,063, the Dow Jones has staged an impressive rally, surging 14.5% in just over nine weeks to reach a fresh record high of 51,665 in early June. After a brief pullback that found support at the psychologically important 50,000 level, the index regained momentum and pushed to a new all-time high last week at 52,286.

At these levels, we are now seeing signs of bearish relative strength index (RSI) divergence, suggesting the uptrend is starting to lose some steam. That said, this does not mean a reversal is imminent. More importantly, it signals that chasing the rally at current levels carries increased risk, and the probability of a deeper pullback is rising.

Dow Jones daily candlestick chart

• _{Source: TradingView. The figures stated are as of 22 June 2026. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.}