Can Wall Street keep rally alive?

WALL Street enters the second half of financial year 2026 (2H26) with plenty to celebrate, but also plenty to worry about.

According to a Bloomberg report, US equities are heading into the remainder of the year facing several critical tests that could determine whether the market’s remarkable rebound can continue.

Investors are weighing whether the artificial intelligence (AI) boom still has room to run, whether stubborn inflation could trigger further interest rate increases, and how November’s US midterm elections may reshape the policy landscape.

Those questions come after one of the most dramatic first halves in recent market history, with US stocks recovering from sharp losses to climb back into positive territory.

“Everyone is so consumed with chipmakers, but will all of this massive AI spending pay off?

“Will we see rate hikes? Inflation spikes? That’s all created nervousness,” Eric Beiley, executive managing director of wealth management at Steward Partners, told Bloomberg.

His firm has already started reducing exposure to selected semiconductor stocks while adding more defensive healthcare and consumer shares to portfolios.

“Chips have been the stars,” he said. “Now we need to see broader participation across the board.”

That broader market participation may become increasingly important as investors question whether technology stocks can continue carrying Wall Street on their own.

Dominating trade

AI trade has dominated markets throughout 2026, with companies linked to semiconductor manufacturing delivering extraordinary returns as businesses continue pouring billions into computing power, memory chips and data infrastructure.

Bloomberg reported that the Philadelphia Semiconductor Index has surged 74% during the second quarter (2Q26), putting it on course for its strongest quarterly performance on record.

Since the start of the year, semiconductor shares have outperformed the broader S&P 500 by 86 percentage points, potentially marking their biggest first-half outperformance in more than three decades.

Memory chipmaker Micron Technology has emerged as one of the market’s biggest winners, rising almost 300% this year and accounting for roughly one-fifth of the S&P 500’s gains.

Flash memory producer Sandisk has climbed more than 780%. Even so, not every AI heavyweight has enjoyed the same momentum.

As of early this week, Nvidia, now the world’s most valuable company and widely regarded as the poster child of the AI boom, has gained just over 3% this year, making it one of the weakest performers within the semiconductor index.

While AI remains the dominant investment theme, Bloomberg noted that several macroeconomic risks could challenge markets over the coming months.

Inflation continues to prove more persistent than many investors expected, raising concerns that the US Federal Reserve may need to tighten monetary policy further if price pressures remain elevated.

Any renewed rise in interest rates would likely test the lofty valuations of growth stocks, particularly technology companies that have benefitted the most from the recent rally.

Politics is also set to become a major market driver.

The United States heads into congressional midterm elections in November, with investors closely watching whether either chamber of Congress changes hands.

A shift in political control could alter tax policy, government spending and regulatory priorities, adding another layer of uncertainty for markets.

Respectable returns

History suggests investors should prepare for a bumpier ride. According to Bloomberg, the fourth year of a bull market has historically delivered respectable returns but also significantly higher volatility.

Since the Second World War, the S&P 500 has averaged gains of around 13% during the fourth year of bull markets, although the summer and autumn months have frequently produced deeper corrections.

Midterm election years have proved especially volatile.

Bloomberg cited Carson Investment Research data showing the S&P 500 typically experiences an average peak-to-trough decline of 17.5% during such years before recovering strongly.

Historically, once the market bottoms, the index has gone on to gain an average of 32% over the following 12 months.

Whether history repeats itself remains uncertain given the extraordinary swings already seen in 2026.

US equities began the year on a far weaker footing after US President Donald Trump’s military action against Iran sparked fears of prolonged conflict in the Middle East.

Oil prices surged as tensions around the Strait of Hormuz intensified, dragging the S&P 500 down more than 7% for the year by the end of March.

However, the market staged an equally dramatic turnaround over the following three months.

Resilient US economic growth, easing geopolitical fears and relentless investor enthusiasm for AI helped erase those losses.

Bloomberg reported that the S&P 500 rallied roughly 20% from its March 30 low to its early June peak, one of only three such recoveries since 2000.

The benchmark index has since climbed more than 7% for the year as of early this week, while the Nasdaq 100 has gained 23% during the 2Q26, making it one of its strongest quarterly performances in more than two decades.

Not every corner of the market has shared equally in the rebound.

Energy stocks, which surged 37% during the 1Q26 as oil prices spiked, have since fallen 13% in the 2Q26 as investors increasingly expect crude prices to ease if diplomatic efforts between the United States and Iran bear fruit.

Commercial real estate management companies and software firms remain among the weakest-performing industries this year, while traditionally defensive sectors such as utilities, consumer staples and materials have also lagged the broader market.

The rebound has nevertheless left US stocks trailing many of their international peers.

With valuations stretched after a powerful 2Q26 rally, investors now face a difficult choice.

One camp believes the worst of this year’s correction has already passed and that history points to further gains after any election-year volatility.

Others argue that the speed of the recovery has left markets vulnerable if inflation, interest rates or political uncertainty begin to undermine confidence.

For now, the 2H26 appears less about whether markets can reach fresh highs and more about whether the forces that fuelled the rally can continue to justify increasingly elevated expectations.