Our Take on the Second Quarter

U.S. stocks ended the quarter just a bit higher than where they began, but they didn't take a smooth path getting there. The broad-based Morningstar US Market Index finished the second quarter up 2.6%. The index is up 2.5% over the trailing one-year period and has now returned an annualized 11.7% over the past five years.

Although the Brexit vote led to two days of steep losses toward the end of the quarter, the market recovered nearly all of its losses with three days of strong gains. As of June 30, the Dow Jones Industrial Average was trading less than 400 points away from its all-time high of 18,312, reached in May 2015. Our analysts find the average stock in our coverage to be trading close to fair value.

But even though valuations remain well above historic norms, corporate earnings remain sluggish. Early in the second quarter, it seemed as though the Fed had the necessary tools in its belt to consider raising interest rates at its June meeting: Though total inflation remained a bit below the Fed's target 2%, consumer and housing data remained strong, and the unemployment rate sank to 4.7%.

Indeed, 10-year Treasury bond yields rose throughout April as investors jettisoned bonds, pricing in a higher probability that the Fed may raise rates at the June meeting. But investors returned to bonds, and yields subsequently fell from 1.8% to 1.7% on June 3, after a Labor Department payrolls report came in much weaker than most market-watchers expected and the probability of a June rate hike fell precipitously. Treasury yields fell a bit further in the final days of June--after the Brexit vote and the subsequent two-day global market sell-off lowered the odds of a rate rise in July or September as well. Between the reduced probability of a near-term rate increase and the flight-to-safety spurred by Brexit, long-term interest rates are lower across the yield curve than at the end of last quarter. The long-term bond and long-government bond categories each gained nearly 6%, outperforming all other fixed-income categories for the quarter ended June 30.

In terms of stock sector performance, energy was the top performer in the quarter, rising more than 11% as oil prices rose over the quarter. The outperformance has stretched the valuations of energy companies, but Morningstar's Peggy Connerty thinks there are a few names worthy of investors' consideration. On the flip side, technology had a rough quarter, sliding 2%. Overall, Morningstar's Brian Colello sees the sector as fairly valued, but notes that there are some attractive opportunities in smartphone-related vendors, and he is sanguine about

Click here for all of our sector wrap-ups and outlook for the full market.

Small-growth funds were the leaders in the quarter, gaining 3.8%. However, it's tough to say that growth prevailed over value or small caps beat large in the quarter, as the leaders and laggards were all over the style box. The large-value category was the second-biggest gainer, adding 2.7%, and the mid-cap-blend and large-growth categories were the laggards, with returns of 1.4% and 0.5%, respectively.

International fund categories were very mixed during the quarter. The Europe-stock fund category with its 2.9% decline, and the foreign small/mid-blend category with a nearly 2.4% fall, were the worst performers in the quarter. An almost 10% jump in the Latin America stock category was the clear winner; however, that category is still down 4.1% over the last year.