As the second quarter of 2026 progressed, global stockmarkets did not take long to shake off concerns about the war in Iran, preferring to conclude the AI trade was a bigger story. AI infrastructure stocks, particularly semiconductor and memory companies, duly powered markets higher although, by June, bullish sentiment had started to wobble.
Overall, market performance was strong between March and June, with the MSCI World index up 13.9%. Gains were far from evenly distributed though and, overwhelmingly, it was a narrow band of AI-related names that dominated. This trend also helped propel Asian markets, with semiconductor and memory behemoths Samsung, SK Hynix and TSMC driving regionals gains.
SpaceX meanwhile made a volatile debut on the Nasdaq stock exchange. Launching on 12 June at $160 (£120) – implying a valuation for the company of more than $2tn – the shares subsequently rose above $200 before tracking back down to the launch price (and beyond). Investors hoping to replicate the 31,000%-odd gain early investors made from Tesla may have longer to wait.
Q2 also proved a difficult period for the hyperscalers as investors started to reappraise their valuations in the light of their vast spending on AI and higher debt levels. These stocks have trailed the S&P 500 index by around 10% since the start of the year, which means the US market is becoming an even more concentrated bet on AI infrastructure. Upcoming IPOs from Anthropic and ChatGPT are likely to push that concentration even further.
More promisingly, by the end of the period, other sectors had started to put their hands up. Healthcare, for example, was strong as investors began to recognise regulatory and pricing risks had diminished. Financials were also buoyant, with strong capital markets activity and commercial loan growth likely to boost earnings. Nevertheless, it was technology’s quarter, with even the beleaguered software sector starting to show signs of a recovery.
“Bond markets really bore the strain of events in the Middle East, selling off in March as the Iran war lifted oil prices and raised the spectre of higher inflation.
Fixed income
Bond markets really bore the strain of events in the Middle East, selling off in March as the Iran war lifted oil prices and raised the spectre of higher inflation. Even with the Strait of Hormuz open and oil prices back to more usual levels, they did not return to normal. As an example, the US two-year Treasury yield, which had been at 3.4% in late February, as investors anticipated Federal Reserve rate cuts, hit a high of 4.2% in mid-June and has remained in that area ever since.
Inflationary pressures have certainly been picking up in the US. According to Arielle Ingrassia, associate director at Evelyn Partners, the latest CPI report kept price rises “firmly in uncomfortable territory”. “The upside was again driven primarily by energy, with gasoline prices rising 7.0% on the month and the broader energy index increasing 3.9%, accounting for more than 60% of the monthly increase in headline CPI,” she adds. Core inflation was relatively contained but it has still been sufficient to trouble bond markets.
Beyond the US, inflationary pressures appear lighter. The latest Eurozone reading showed inflation at 2.8% – around 20 basis points below consensus expectations – while the UK reading also surprised on the downside.
“UK inflation significantly undershot expectations,” observes Michael Browne, global investment strategist at the Franklin Templeton Institute. “The primary cause was food prices, which have been weak, due to increased production in 2026 following high prices in 2025. Also notable were household costs – specifically domestic energy, water and gas bills.”
Yields in the UK duly came down a little but remain significantly higher than at the start of the year. For the time being, incoming prime minister Andy Burnham has made the right noises on fiscal prudence, which has kept yields in check. Bond markets remain nervous , however, and are quick to price in bad news. It is another lesson to all policymakers that bond markets continue to have the final say.
To repeat the title of last quarter’s review, OK … what next? The on/off nature of the war in Iran matters to markets because of what it may or may not do to inflation. The Strait of Hormuz briefly reopened at the end of June but the ceasefire finally went from tentative to officially ceased on 8 July. The oil price has inevitably pushed higher although, for now, it at least remains in double-digits per barrel.
The direction of inflation is keeping both central bankers and global financial markets on their toes. Inflation in the US is starting to look more persistent and rate cuts vanishingly unlikely. By contrast, in the UK and Europe, inflationary pressures have been less bad than feared. The difference may be the US labour market, which remains strong, offering scope for inflationary pressures to spread through the economy. At the same time, higher energy prices have proved relatively contained elsewhere.
For Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, inflation remains the biggest risk for the second half of the year. “There is a lot of AI capex,” he points out. “Inflation is more persistent and we have the arrival of Fed chair Kevin Walsh as well, which will potentially create more uncertainty. Inflation remains our base case as we look towards the second half of the year.”
If events in the Middle East took a turn for the better, inflationary risks might be contained. Central banks might not need to raise rates and contagion through the economy would be limited. It is possible that within a few months, markets could even start to anticipate rate cuts again. For now, though, any kind of permanent peace still looks some way off and, in the meantime, inflation will remain a significant concern for markets.
Markets have been very concentrated for a few years but that has been on steroids in 2026.”
It is not, however, the only one – and worries persist around the growing concentration of the US market. Recent gains have been narrowly focused on AI infrastructure stocks such as AMD, Broadcom and Micron, notes Will McIntosh-Whyte, fund manager on the Rathbone multi-asset portfolio funds.
“Markets have been very concentrated for a few years but that has been on steroids in 2026,” he adds. “The S&P 500 is up 10% and 75% of that gain has come from eight stocks.” Concentration in the S&P 500 continues to hit new highs, with the top 10 stocks comprising more than 36% of the index.
What is more, the problem is spreading to other regions. The MSCI Asia ex Japan benchmark rose 28% over the quarter, with gains similarly concentrated in a handful of names – for example, TSMC now accounts for 17% of the index’s market capitalisation. Indeed, technology is now over the half the capitalisation of the index, with Taiwan and Korea making up 57% between them. China has been consigned to 21%, with India at just 12.4%.
Major regulators, including the Bank of England, the Bank of Japan and the Bank for International Settlements, have been warning about high valuations. For the time being, companies involved in AI continue to deliver sufficiently high earnings to justify their ambitious valuations. The danger is that any weakness is punished viciously by markets that now nurture huge expectations for AI growth and investors find themselves insufficiently diversified when the problem hits.
Geopolitical fragility
At the same time, the historic geopolitical order continues to erode, with old alliances now challenged by a US administration with a different agenda. This is having an impact on supply chains, on power provision and on defence, which has implications for specific sectors.
“The world has woken up to long supply chains,” says Robert Lancastle, senior fund manager on the JOHCM Global Opportunities fund. “We became aware post-Covid of China being the dominant manufacturing force globally, while Ukraine highlighted energy fragilities – particularly in Europe. Then we had ‘Liberation Day’ – which reinforced Europe’s over-reliance on the US for defence capabilities – and now there is the Iran war.”
A growing number of fund managers are looking at energy security in the wake of the Iran crisis, reasoning governments will prioritise electrification once again. This time, though, it is not climate considerations but energy independence that is the driving force behind decision-making.
Lancastle, for example, is looking at businesses in the electric vehicle supply chain, where a handful of niche components makers are dominant, as well as those likely to benefit from the restructuring of energy supply chains, as governments seek to reduce their reliance on the Strait of Hormuz. He has been buying companies such as Australian petroleum exploration and production company Woodside Energy, energy technology company Baker Hughes and industrial equipment group Emerson.
To say there is plenty of political drama to occupy investors feels like an understatement. The UK, for example, is looking ahead to life under its seventh prime minister in a decade while the now-familiar months’ long speculation over the Budget is likely to be particularly acute this year. Investors may need to brace for significant UK bond market volatility in September and October.
Come November, the US will face its own dramas around the mid-terms when voters deliver their verdict on Donald Trump’s presidency and at least one of the houses looks likely to flip to the Democrats. This may, in turn, launch a range of legal attacks on the president. The worry is, in the absence of domestic power, Trump will look to focus more on foreign policy, which has not always proved comfortable for the US’s historic allies.
Even so, amid all this noise, Fidelity’s Ahmed says there is nothing in the economic data that is worrying him unduly. “Our leading indicators are not showing any visible sign of any kind of a massive declaration,” he explains.
“There is dispersion – but nothing to worry us in terms of cyclical momentum. The AI capex story has been a very powerful one. It remains a powerful one as we look into the second half of the year.” The virtuous circle – whereby AI-centred capex is helping financial conditions – continues, he adds, and is currently contributing to economic growth momentum as well.
Clearly there is plenty that could go wrong over the second half of the year – a re-re-escalation in Iran, a loss of faith in the AI trade, a new and disruptive policy initiative from the White House, a government debt crisis … and yet, for the time being at least, positive momentum remains intact and the world economy continues to dodge the various brickbats hurtling its way.
