So far in 2026, we’ve seen that benchmark index returns can obscure important market dynamics. Even during a historically strong quarter, underlying dispersion created meaningful opportunities for tax-loss harvesting in custom equity portfolios.
Second-quarter comeback
After stumbling in the first quarter, the market staged an impressive comeback, with the S&P 500® Index gaining 15.2% during the second quarter—the strongest performance since the stimulus-driven rebound of 2020. Despite significant oil supply disruptions and firmer monetary policy remarks from the new Federal Reserve Chair, stocks pushed steadily higher, and nearly two-thirds of index constituents finished the quarter in positive territory.
The broad-based recovery from the volatility and uncertainty that weighed on equities earlier in the year produced one of the strongest quarters in recent memory. Dynamics fueling the rally included continued strength in technology and AI-related stocks, robust corporate earnings and a weaker US dollar. Market participation also broadened beyond the mega-cap leaders, with small-cap, micro-cap, equal-weight and value benchmarks all reaching new highs.
Tax-loss harvesting environment
Notwithstanding the broad rally and a stellar quarterly print for the S&P 500, stock-level volatility and dispersion metrics soared to near-record readings. While index-level volatility as measured by the CBOE VIX descended throughout the quarter, average single-stock volatility reached a 12-month high of 45%.
That created a surprisingly strong environment for tax-loss harvesting. Among the index constituents, 170 stocks finished with negative returns for the quarter, with an average loss of -11.37%, while 81 names declined by more than 10%, with an average loss of -19.37%.
For the second quarter, Parametric’s systematic loss harvesting approach realized almost $3.5 billion in losses across over 350,000 trades and delivered a potential tax benefit1 of over $1.3 billion to Custom Core investors. Through the first six months of the year, Parametric has realized over $7.4 billion in losses, providing a potential tax benefit of over $2.8 billion.2
See more: 2026 Q2 CIO Review and Outlook
The bottom line
The first half of 2026 was a powerful reminder that headline index returns rarely tell the full story. Even in one of the strongest quarters on record, meaningful dispersion beneath the surface created ample opportunity for tax-loss harvesting—a dynamic that Parametric's systematic approach has been uniquely designed to capture.
Whether markets are rallying, retreating or churning sideways, our process continuously scans for losses at the security level. That helps investors find opportunities to potentially benefit from volatility regardless of market direction.
1 The potential tax benefit is calculated by applying the maximum federal rates for short-term and long-term capital gains, which are currently 40.8% and 23.8% respectively. Quantifying the tax benefit of harvested losses assumes the taxpayer has sufficient long-term and short-term capital gains to use the harvested losses against.
2 Source: Parametric, 6/30/2026. The information is provided for illustrative purposes only. Values are aggregated across all equity direct indexing strategies. Only client positions with unverified cost basis were excluded from calculations. Loss calculation is based on the amortized book price minus the sell price, represents historical information and should not be construed as future results. Loss information illustrates the effect to a portfolio and is not representative of, and should not be construed as, performance. There is no assurance that tax loss harvesting will continue in the future. There is no guarantee that any specific amount may engage in tax loss harvesting.
Parametric and Morgan Stanley do not provide legal, tax, or accounting advice or services. Clients should consult with their own tax or legal advisor prior to entering into any transaction or strategy described herein.
This is not recommendation to invest in a Qualified Opportunity Fund. All investments are subjected to risk, including the risk of loss. The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
07.16.2027 | RO 5752195
Investment advisory services offered through Parametric Portfolio Associates LLC ("Parametric"), an investment advisor registered with the US Securities and Exchange Commission (CRD #114310). Parametric is also registered as a portfolio manager with the securities regulatory authorities in certain provinces of Canada (National Registration Database No. 42850) with regard to specific products and strategies. Parametric provides advisory services directly to institutional investors and indirectly to individual investors through financial intermediaries. The information on this website does not constitute an offer to sell, or a solicitation of an offer to purchase, securities in any jurisdiction to any person to whom it is not lawful to make such an offer. Investing entails risks, and there can be no assurance that Parametric (and its affiliates) will achieve profits or avoid incurring losses. All investments are subject to potential loss of principal. Parametric does not provide tax or legal advice. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the disclosure page for important information about investments and risks.
S&P Dow Jones Indices are a product of S&P Dow Jones Indices LLC (“S&P DJI”) and have been licensed for use. S&P® indexes are registered trademarks of S&P DJI; Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); S&P DJI, Dow Jones, and their respective affiliates do not sponsor, endorse, sell, or promote Parametric and its strategies, will not have any liability with respect thereto, and do not have any liability for any errors, omissions, or interruptions of the S&P Dow Jones Indices.
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