During the second quarter of 2026, optimism prevailed across markets, despite significant geopolitical uncertainty.
In the second quarter, geopolitics and technology continued to dominate market movements. Risk sentiment turned decisively positive as the war in the Middle East began to de-escalate and Brent crude prices started to fall after peaking at USD 120 per barrel in April. Above all, the market rotation back into the artificial intelligence (AI) trade propelled technology stocks higher.
Investors gained confidence over the quarter that the super capital expenditure (capex) cycle supporting the build-out of AI infrastructure and data centres is almost unaffected by the conflict in the Middle East, as US hyperscalers continued to raise their capex guidance for 2026 to an impressive USD 700 billion. Since the beginning of the war in Iran on 28 February 2026, estimates for 2026 earnings growth for global equities were revised up by 11 percentage points to 27.6%, with the information technology (IT) sector as a key driver. Developed market equities rallied 13.9% in the second quarter of 2026 on the improving earnings outlook.
Emerging markets equities skyrocketed 24%, marking the best quarterly gain since the second quarter of 2009. The large share of semiconductors and IT hardware in the MSCI EM explains this landmark performance, as investors’ preference continued to shift to companies that produce the “picks and shovels” of the AI boom. Growth stocks also benefited from the return of the AI investment cycle, outperforming value stocks by 9.6% pts over the quarter. Strong performance of companies in the AI supply chain also contributed to the 15% return of small caps during the quarter.
Global bond markets didn’t have a clear direction in the second quarter as markets evaluated the impact of energy price volatility on inflation and growth. The Global Aggregate Index eked out a small gain of 0.9% as spreads in credit markets tightened on the back of robust corporate earnings.
Commodities faced a stiff headwind over the last three months. Oil prices fell by 38% as the war in Iran de-escalated and a memorandum of understanding signed between the US and Iran was expected to lead to a reopening of the Strait of Hormuz, easing the supply disruption in energy markets. Gold and precious metals fell more than 10% as the currency debasement trade lost further momentum. Markets expect that the Federal Open Market Committee (FOMC), under the new Federal Reserve (Fed) Chair, Kevin Warsh, is still committed to price stability. Industrial metals rose on the back of technology and infrastructure investment demand. Nevertheless, commodities lost 8% in the second quarter.
Equities
The best-performing major equity market region was Asia ex-Japan, which returned 28%. Key performance contributors were Korea (+88%) and Taiwan (+49%), driven by strong investor demand for electrical equipment companies and semiconductors. Index heavyweights SK Hynix and Samsung Electronics tripled and doubled in value, respectively, propelling Korean equities to their best quarterly performance since 1998. Over the quarter, both companies joined the exclusive club of companies with a market cap exceeding USD 1 trillion. Despite the strong performance, SK Hynix still trades at 7x 12-month forward earnings, while Samsung is valued at 6x 12-month forward earnings, a testament to the explosive earnings growth in the semiconductor and memory industry due to the AI investment boom. Emerging markets in the Middle East and Latin America with high exposure to energy companies underperformed the MSCI Emerging Markets. The MSCI China index underperformed due to retail and auto sector weakness.
A fundamentally cheap currency and a further steepening of the yield curve provided a tailwind for Japanese exporters and the financial sector. The TOPIX gained 14% over the last three months. The S&P 500 first quarter 2026 earnings season was the strongest in recent years: 85% of companies beat consensus expectations, the most since 2021 and well above the long-term average of 73%. The AI build-out is supporting earnings growth across sectors. Banks are benefiting from AI-driven capital markets activity, and demand for electrical equipment is boosting industrials. US equities gained 15% over the quarter.
Continental European equities rallied on de-escalation in the Middle East and resilient economic sentiment. Consumer confidence recovered from April lows while the eurozone manufacturing purchasing managers’ index (PMI) remained above 50, in expansionary territory, through last quarter. In the second quarter, the MSCI Europe ex-UK returned 14%. UK equities gained 5% but lagged other regions over the period due to relatively large exposure to the commodity downturn and the more defensive sector composition of the index.
Fixed income
UK Gilts gained 2.1%, outperforming the global bond index in the second quarter and more than recovering the losses of the previous quarter. The growth outlook worsened as UK composite PMIs fell to 49.7 in May and house prices showed renewed weakness. The latest CPI print at 2.8% came in lower than consensus estimates of 3.0% and core inflation fell from 3.1% year-over-year (yoy) to 2.6% in the quarter, reducing the probability of near-term rate hikes from the Bank of England. Sterling markets took UK prime minister Sir Keir Starmer’s resignation largely in their stride, with Andy Burnham the most likely candidate to take over in July.
The European Central Bank (ECB) delivered its first rate hike after an 11-month pause, bringing the deposit rate to 2.25%. Euro government bond markets digested the widely anticipated move well, outperforming the global bond index as falling inflation expectations and a weaker growth outlook supported bond prices. Inflationary pressures in the eurozone are still moderate: headline eurozone CPI increased to 3.2% in May while core CPI increased modestly to 2.5%. Inside the region, German Bunds returned 1.5%, underperforming vs. Italy (+2.5%) and Spain (+1.9%) with investors showing less preference for safe-haven assets as geopolitical risk receded.
US government bond yields stayed relatively flat in the quarter. Consumer prices rose by 0.5% in May, resulting in a yoy increase of 4.2%. Most of this gain was due to a 7.0% jump in gasoline prices. But falling oil prices should lower price pressures in the coming months. Currently, there is little evidence that higher inflation is feeding through to higher wages. Despite a relatively tight labour market with an unemployment rate of 4.3% and healthy private payroll growth, average hourly earnings for all workers rose just 3.5% in May, the second-smallest gain in five years. Not surprisingly, the Fed held interest rates at 3.50%–3.75%, but both the statement and press conference skewed hawkish.
In Japan, the Bank of Japan (BoJ) delivered a widely expected interest rate hike to 1.0% in June. Strong wage growth momentum, with monthly cash earnings up 3.6% yoy, and a 6.3% yoy jump in producer prices are keeping the BoJ’s policy bias hawkish through 2026. Yields on 10-year Japanese government bonds (JGBs) continued trending higher, reaching 2.7% by the end of the second quarter. JGBs underperformed the broader index, returning -1.3%.
In credit markets, spreads tightened across both high yield and investment grade bonds. With additional support from duration, the EUR high yield market returned 3.7% in the second quarter, outperforming the 2.5% return in US high yield; global investment grade bonds returned 1.5%. An improving inflation outlook and the expectation of less restrictive central bank policy created a strong tailwind for emerging market debt, which rallied 4.0% over the last three months.
Conclusion
During the second quarter of 2026, optimism prevailed across markets, despite significant geopolitical uncertainty. While the situation in the Middle East is on a path of de-escalation, it remains fluid and future outcomes are far from certain. As detailed in our 2026 mid-year outlook, Enough Fuel in the Engine, the global economy is no longer being powered by all its growth engines as the Middle East conflict has dented consumer spending and reduced the amount of monetary fuel that is being added. However, AI capex continues to support activity and government spending looks set to accelerate. Against this more complex backdrop, we remain constructive on risk assets; our base case expects limited lasting economic damage from the conflict in the Middle East and that all growth engines are working again by 2027.