The end of June marks month-end, quarter-end and first half-end for 2026. It’s been a topsy-turvy year already and we’ve seen a lot of rotational churn across equity markets even as they’ve hit new highs. Gold and bitcoin have done rather less well. The AI traded has shifted from hyperscalers to those companies benefitting from their massive spending. A new Fed chair has set in train a regime shift that will have important implications for financial markets going forward. The UK’s prime minister resigned. A resurgent dollar sent the yen to a 40-year low as US inflation rose. SpaceX went into orbit with its IPO before crashing back to earth nearly as swiftly.
Some big shifts have taken place in the last 3-6 months. One, the US-Iran war has retreated into the rearview mirror, with oil prices back to pre-war levels. Two, the AI trade has seen increased concentration but a shift away from Mag7 (ex-Nvidia) to semis and memory stocks, which have flown. Software was out, in came hardware and infrastructure stocks. Three, the market is adjusting to a new Fed regime that will be quicker to adjust policy rates in order to meet its objectives. These are the parameters for the next 6 months and the forthcoming earnings season is critical to how the rest of the year goes. In the UK we have political dimension to contend with as Andy Burnham takes charge in Number 10 shortly, which will present investors with tricky questions about the path of economic policy – particularly in relation to borrowing and how this could impact gilt yields.
The market bottomed on 30 March, with the S&P 500 and Nasdaq 100 hitting their cycle lows at that point following the onset of the US-Iran war. Whilst the shooting rumbled on markets started to make strong gains as the direction of travel shifted materially towards peace. That means we shouldn’t read too much into the quarterly performance of some of the major indices due to market timing the quarter end so neatly. Nevertheless, it’s been a very good quarter for equities.
The MSCI All World rose +14% for the quarter, the best second quarter performance in 6 years. The rally has been super concentrated in the AI trade, particularly in Asia where South Korea, Japan and Taiwan have been standout performers. The Nasdaq has added about 20% for the quarter despite dropping 4% in June. The S&P 500 is about 14% higher despite a roughly –2% pullback in June - one day of trade to go we should note. It’s been the best quarter in six years for the two major indices, while the Dow has had its best since 2022. The best performing US stocks (min $10bn market cap) were all chipmakers - Astera Labs, SanDisk, Micron, Intel, United Microelectronics, Silicon Motion Technology, Marvell Technology, AMD.
The FTSE 100 added about 4% for the quarter, its sixth consecutive quarterly advance, though gains have been noticeably more modest than markets where AI has been much more dominant. This quarter's top performers on the FTSE 100 are easyJet, Intertek, Polar Capital, Segro, IAG, DCC and InterContinental Hotels. Several of those were subject to takeover bids. BP, Babcock, Shell and Centrica are among the largest decliners as energy prices fell and the steam came out of the defence trade. Theme-wise we saw banks do very well over the quarter (+20%) while housebuilders suffered from the lacklustre housing market. Defence lost its lustre amid delays, backtracking and doubts about just how much government spending can actually increase.
Commodities have been very volatile: oil down 17-18% for the quarter – the steepest loss since 2020, silver -21%, gold –13%, while copper rallied 10% on the improved outlook for growth as tensions in the Middle East eased.
In FX, the dollar has been the big winner, up around 1.4% for the quarter. The yen has struggled since the first week of May and hit a fresh 40-year low against the greenback.
H1 2026 Market Recap: Chips with everything
The first half of 2026 was a reminder that markets do not require calm conditions to perform well—they require confidence that corporate earnings can continue to grow. Investors spent six months navigating a new Federal Reserve chair, renewed conflict in the Middle East, volatile oil prices, stubborn inflation and elevated bond yields. Yet despite these headwinds, many major equity markets ended the half close to record highs, driven overwhelmingly by continued strength in artificial intelligence, resilient corporate profits and a willingness among investors to buy every meaningful dip.
If 2025 was the year AI became the dominant investment theme, H1 2026 was the period in which markets concluded it was becoming the dominant earnings story and investors started to be a lot more selective about their exposure to AI. Capital expenditure by hyperscalers remained extraordinary, semiconductor demand continued to exceed expectations, and investors increasingly distinguished between companies genuinely benefiting from AI investment and those merely claiming exposure. The result was another period of narrow but powerful market leadership, with technology, semiconductor and AI infrastructure companies accounting for a disproportionate share of global equity gains.
The ten largest companies make up nearly 40% of the S&P 500. But investors have meaningful – though we are not sure durably – rotated away from Mag 7 names into semis. In fact semiconductor stocks now make up 20% of the S&P 500, the highest share on record and x4 up from 2020. Passive investing continues to accelerate dominant trends – per Citadel we note that ETFs have attracted $1.2 trillion in net inflows year-to-date, which it says is 45% ahead of last year's record.
Away from technology, the global economy proved more resilient than many forecasters had anticipated. Consumer spending held up better than expected across much of the developed world, unemployment remained historically low, and corporate earnings repeatedly surprised to the upside. Although valuations became increasingly demanding, investors appeared comfortable paying premium multiples for businesses capable of delivering sustained earnings growth.
The principal challenge came from geopolitics. The escalation of tensions between the United States, Israel and Iran briefly threatened one of the world's most important energy supply routes, sending oil prices sharply higher and reigniting concerns that inflationary pressures might re-emerge. Markets initially reacted defensively, but as ceasefire efforts progressed and fears of prolonged disruption to the Strait of Hormuz faded, oil prices retreated and risk appetite recovered remarkably quickly. By the end of June, investors had largely concluded that the economic damage would be limited, reinforcing the now familiar pattern of markets treating geopolitical shocks as opportunities to add risk rather than reasons to reduce it.
Another defining development was the arrival of Kevin Warsh as Chair of the Federal Reserve. Markets spent much of the previous year anticipating a gradual easing cycle, but the new leadership introduced a noticeably more hawkish tone. Investors increasingly accepted that interest rates could remain higher for longer as policymakers prioritised bringing inflation back to target over supporting growth. Treasury yields remained elevated throughout much of the half, placing pressure on rate-sensitive sectors such as real estate while leaving equity markets increasingly reliant on companies capable of generating strong earnings regardless of financing conditions.
I think the arrival of Warsh is incredibly important to the rest of the year and beyond. He signals a new credibility by being willing to adjust front-end rates swiftly, a hyper-adaptive reaction function which will in turn anchor inflation expectations, reduce term premia and flatten the curve. The big thing to look out for as we enter H2 and July is a rate hike by the Fed.
Q2 2026: Earnings trumped everything else
The second quarter encapsulated the character of the first half almost perfectly. Nearly every major macroeconomic story—from escalating conflict in the Middle East to shifting Federal Reserve expectations—proved capable of unsettling markets temporarily, yet none fundamentally altered investors' conviction that corporate earnings, particularly within AI-related industries, would remain exceptionally strong.
The Q1 corporate reporting season reinforced that belief. Technology companies continued to deliver robust revenue growth, cloud providers maintained aggressive investment plans, and AI infrastructure spending showed few signs of moderation despite questions over valuation. The willingness of companies to continue investing heavily suggested executives themselves saw little evidence that demand was slowing. Markets responded by rewarding businesses delivering credible AI-driven earnings while becoming noticeably less forgiving towards companies missing expectations. And we have started to see some question marks over AI - particularly when Mag7 names are coming to market with debt and capital raises to fund investments.
The first half of 2026 also highlighted how quickly markets can reprice geopolitical risks. Oil prices surged as fears grew that conflict involving Iran could disrupt shipping through the Strait of Hormuz, reviving concerns over inflation and forcing investors to reassess the outlook for central bank policy. However, once tensions began to ease and shipping routes remained largely operational, much of the energy premium evaporated. Equity markets recovered rapidly, reinforcing the increasingly familiar tendency for investors to look through geopolitical events unless they produce sustained economic disruption. Indeed the market bottomed before we really saw the emergence of a concrete roadmap towards reopening the Strait.
Meanwhile, the Federal Reserve continued to exert considerable influence over market sentiment. The combination of resilient economic data, sticky inflation and a more hawkish policy stance kept bond yields elevated and reduced expectations for rate cuts. A key shift this year has been the market moving from expecting Fed support to realising it's not on hand. So another factor in the ‘June swoon’ was the market waking up to the new Fed regime – more responsive to policy adjustments and more likely to hike soon. This I think means a more stable inflationary outlook and more benign regime for growth stocks on balance, but it’s a new way of thinking for market participants after years of the Fed holding the markets’ hand.
June 2026: A game of two or even three halves
June neatly illustrated the speed with which market narratives can evolve. The first half of the month was dominated by risk aversion as conflict involving Iran escalated, oil prices surged and investors questioned whether inflation might begin accelerating again. Higher energy prices, together with expectations of tighter monetary policy, weighed particularly heavily on technology shares and pushed market volatility higher. I think also there was a strong flow-of-funds dynamic as we reached the end of the quarter, major index rebalances and a new pension cycle in the US.
The mood shifted a bit during the second half of the month. Diplomatic progress reduced fears of wider regional escalation, shipping through the Strait of Hormuz resumed with relatively limited disruption and oil prices gave back much of their earlier gains. At the same time, investors refocused on the underlying drivers that had supported markets throughout the year: resilient earnings, continued AI investment and an economy that remained surprisingly robust despite restrictive monetary policy. Equity markets recovered strongly into month-end, leaving June as another example of markets proving considerably more resilient than headlines might have suggested. However, we saw considerable volatility in the tech sector in the final full week of trading (22-26 Jun) as the Nasdaq succumbed to five straight days of losses.
The themes that defined the first half
Looking back, four themes stand out. First, artificial intelligence continued its transition from a compelling narrative into a measurable earnings driver, justifying continued capital investment and supporting elevated valuations - for selective stocks! Whether memory stocks can keep skyrocketing remains to be seen. I'd expect to see some further rotation in H2. Second, as per my oft-stated view: geopolitics for show, fundamentals for dough: geopolitical shocks remained important but increasingly transient, generating volatility without fundamentally changing the economic outlook. Third, higher bond yields and a more hawkish Federal Reserve failed to derail equities because corporate profitability remained sufficiently strong to offset tighter financial conditions. This is only one half of the story though; I would argue that in fact the ‘hawkish’ Fed will push down rates in the longer term, which is what markets and the President actually want). Finally, market leadership remained unusually concentrated, with a relatively small group of companies responsible for a significant proportion of overall index performance.
These themes leave investors entering the second half facing a familiar set of questions. Can earnings continue growing quickly enough to justify premium valuations? Will inflation finally allow central banks greater policy flexibility, or will interest rates remain restrictive for longer than markets hope? Could geopolitical tensions once again threaten energy markets, or has the worst already passed? And perhaps most importantly, will market leadership broaden beyond AI, or will a handful of technology companies continue to determine the direction of global equity markets?
If the first six months demonstrated anything, it is that markets remain remarkably willing to overlook macroeconomic uncertainty provided the earnings outlook continues to improve. For now, profits—not politics—remain the dominant force shaping investor returns.
