Capital markets delivered an unexpectedly strong second quarter. Despite escalating conflict in the Middle East, renewed inflation pressures, and consumer sentiment near historic lows, equities climbed on the back of renewed enthusiasm for artificial intelligence, particularly semiconductor and memory companies, along with one of the strongest IPO markets in years.¹
Performance was broad. Emerging markets significantly outperformed during the quarter, followed by U.S. small caps, while developed international and U.S. large-cap stocks also posted strong gains.²
The result is another encouraging year for diversified investors, with the MSCI ACWI outpacing the S&P 500 year-to-date.² Perhaps most importantly, leadership continues to broaden beyond the handful of mega-cap technology companies that defined the last several years.³
Story 1: AI is creating value, but not equally
Artificial intelligence is clearly improving productivity across the economy, but investment opportunities are becoming more nuanced.⁴
As AI models become increasingly commoditized, the greatest economic value may lie less in the models themselves and more in how businesses deploy them.⁴ That creates an increasingly difficult hurdle for frontier-model companies making enormous capital investments. At the same time, it strengthens the case for firms supplying the infrastructure behind AI.⁵
Memory manufacturers remain among the clearest beneficiaries. South Korea, home to many of the world's leading memory producers, has seen its equity market surge this year as demand for AI hardware continues to accelerate.⁵
Story 2: Inflation remains the biggest risk to growth
The market's biggest question entering the second half is inflation.⁶
Much of the recent pressure has been energy-related, but persistent inflation could slow growth by forcing the Federal Reserve to keep policy tighter than investors currently expect. Markets continue to price in rate cuts, yet that assumption may prove optimistic.⁶
Adding another wrinkle is incoming Fed Chair Kevin Warsh. While often viewed as business-friendly, Warsh has also been an outspoken critic of prolonged easy-money policies and has expressed concern over persistent fiscal deficits.⁷ If inflation remains elevated, investors expecting an accommodative Fed could be surprised.
Story 3: IPO enthusiasm is back
Q2 also marked the return of blockbuster IPOs.¹
Historically, IPOs often perform well immediately after listing as excitement, limited share supply, and compelling narratives drive demand. Longer term, however, the evidence is less encouraging. Newly public companies have generally underperformed the broader market over the following one to three years as investor attention shifts from growth stories to sustainable profitability.⁸
That doesn't mean today's IPOs will all disappoint. We view IPO enthusiasm as a useful gauge of investor sentiment rather than a reason to alter long-term portfolio strategy.
Point to Watch: AI bubble fears are making markets jumpy
Every major technological revolution invites comparisons to the last one. Today's favorite analogy is the dot-com bubble. The internet fueled extraordinary valuations, markets crashed, and the Nasdaq took years to recover.
It's an understandable comparison. It's also an incomplete one.
Unlike many companies of the late 1990s, today's AI leaders generate substantial revenue, cash flow, and profits.⁹ Speculation certainly exists, but it is layered on top of businesses with proven economics rather than ambitious business plans.
Market structure has also changed. Institutional, algorithmic, and quantitative strategies now account for a much larger share of trading activity, producing faster and sharper rotations than investors experienced a generation ago.¹⁰ This year alone we've watched leadership swing rapidly between hard assets, AI infrastructure, semiconductor memory, and other sectors. These rotations can feel unsettling, but they have become a defining characteristic of modern markets.
None of this eliminates the possibility of an AI correction. Expectations will reset, some companies will prove overvalued, and volatility is inevitable. But history rarely repeats itself neatly enough to provide an investment roadmap.
Our response remains the same. Stay globally diversified, maintain exposure to quality businesses with genuinely rock-solid balance sheets, and allow momentum to guide, not dictate, portfolio tilts.¹¹ In markets that can change leadership almost overnight, a disciplined investment process is usually a better asset than a convincing narrative.
Closing Thoughts
The second quarter rewarded patience over prediction. Gains in AI infrastructure, emerging markets, and small caps reflected a welcome broadening of market leadership, even as inflation, geopolitics, and investor enthusiasm continue to create meaningful risks.
Rather than chasing whichever story dominates the headlines next, we remain focused on building globally diversified portfolios of high-quality businesses and rebalancing with discipline. That is rarely the most exciting approach, but over full market cycles it has consistently proven to be one of the most durable.
Footnotes
1. Morgan Stanley. A Larger, Broader IPO Market Takes Shape.https://www.morganstanley.com/insights/articles/ipo-market-scale-breadth-2026
2. J.P. Morgan Asset Management. Guide to the Markets, Q3 2026. Global equity returns by asset class; MSCI ACWI and S&P 500 year-to-date performance. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
3. BlackRock Investment Institute. Student of the Market Commentary June–July 2026. Market breadth and broadening equity leadership. https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf
4. Goldman Sachs Global Investment Research. Harnessing AI for the Real Economy, 2026; https://www.goldmansachs.com/what-we-do/investment-banking/insights/articles/harnessing-ai-for-the-real-economy/goldman-sachs-harnessing-ai-for-the-real-economy.pdf
5. Goldman Sachs Global Investment Research. Why Korea’s Stock Market is Forecast to Rise to Record Highs, March 2026. https://www.goldmansachs.com/insights/articles/why-koreas-stock-market-is-forecast-to-rise-to-record-highs ; J.P. Morgan Asset Management Guide to the Markets, Global Equity Themes, July 2026.
6. J.P. Morgan Asset Management. Guide to the Markets, Q3 2026. Inflation, Fed expectations, and market pricing. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
7. Barrons. Why Warsh Won’t Be Remembered for Cutting Rates. February 2026. https://www.barrons.com/articles/why-warsh-wont-be-remembered-for-cutting-rates-796c4937?st=urfMRB
8. Dimensional Fund Advisors. Do IPOs Have a Placed in Your Portfolio?https://www.dimensional.com/us-en/insights/do-ipos-have-a-place-in-your-portfolio
9. BlackRock Investment Institute. Student of the Market Commentary, June–July 2026. Market breadth and broadening equity leadership. https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf
10. BlackRock Investment Institute. Student of the Market Commentary, June–July 2026. Market breadth and broadening equity leadership. https://www.blackrock.com/us/financial-professionals/literature/investor-education/student-of-the-market.pdf
11. Avantis Investors. Our Scientific Approach to Investing White Paper. https://res.americancentury.com/docs/inst-avantis-scientific-approach-to-investing.pdf