Global equities gained in Q2 amid a resurgence in optimism around the AI capital expenditure theme as well as news of a ceasefire in the Middle East. Asia ex-Japan equities experienced particularly strong performance. Global bond markets were largely driven by changing energy price and inflation expectations. Commodities fell.
Global equities
Global equities posted a strong second quarter of 2026, with the MSCI World Index rising 13.8% in US dollar terms. The dominant driver was continued momentum in artificial intelligence (AI) and related capital investment cycles, which strengthened technology-heavy markets and economies that are embedded in semiconductor and advanced electronics supply chains.
This reinforced global leadership in growth-oriented equities, as investors increasingly favoured companies with long-term earnings drivers over cyclical exposure. At the same time, moderating inflation pressures and relatively stable interest rate expectations supported investors’ risk appetite and helped sustain equity valuations.
Asia and emerging markets outperformed, with economies that play critical roles in the AI and semiconductor supply chain delivering particularly strong gains. Markets with greater dependence on commodities or more domestically focused economies generally lagged.
Geopolitical tensions in the Middle East added intermittent volatility during the quarter. The announcement of a US–Iran ceasefire framework and a memorandum of understanding (MOU) eased concerns about a broader regional conflict. Energy prices retreated and investor sentiment improved as fears of a sustained disruption to global energy supplies diminished.
US
The S&P 500 Index increased 15.2% in the second quarter, marking its strongest quarterly gain since 2020. The advance was driven by a combination of resilient corporate earnings, continued enthusiasm about AI and a market environment that gradually became more comfortable with the outlook for inflation and economic growth. By the end of June, gains had broadened beyond a narrow group of mega-cap technology names, with more cyclical sectors participating in the rally.
A defining feature of the quarter was the persistent strength of the AI investment cycle. Investors continued to channel capital into companies positioned to benefit from surging demand for computing power, data infrastructure, semiconductors and cloud-related services. Record results from several semiconductor and semiconductor equipment companies helped reassure investors that the AI infrastructure buildout remained intact, even against an uncertain macroeconomic backdrop. The market also increasingly differentiated between companies simply exposed to AI themes and those demonstrating tangible earnings contributions from AI adoption.
Equities were supported by resilient corporate results and confidence that economic growth remained durable, although inflation and Federal Reserve (Fed) policy expectations remained sources of volatility. Early in the quarter, heightened tensions in the Middle East briefly pushed oil prices higher and increased risk premia across markets. The announcement of the US–Iran ceasefire agreement helped ease concerns about potential supply disruptions and accelerated the decline in oil prices from their intra-quarter highs. That contributed to the energy sector’s underperformance by quarter-end.
The market also adjusted to the transition to a new Fed Chair. While investors remained sensitive to inflation and labour market data, the tone from the Fed helped anchor expectations that policy would not become excessively restrictive unless inflation re-accelerated. That stability in policy expectations supported equity valuations, particularly in growth-sensitive sectors.
Information technology was by far the strongest-performing sector, led by semiconductors and AI infrastructure companies. Communication services and consumer discretionary also had a solid quarter.
Eurozone
Eurozone equities, as measured by the MSCI EMU index, rose strongly in the quarter. The top performing sectors were information technology (IT) and financials. IT stocks performed well amid some strong corporate earnings and optimism over the outlook for AI and related technologies. Energy and communication services posted negative returns for the quarter. The energy sector suffered as oil prices dropped down to levels seen before the outbreak of hostilities between Iran and the US and Israel.
The euro area’s annual inflation rate was 3.2% in May, up from 3.0% in April. The European Central Bank (ECB) raised interest rates by 25 basis points (bps) in June given above-target inflation as a result of the energy shock caused by the conflict in the Middle East. The ECB also raised its outlook for inflation for this year and next and cut its growth projections.
Data published by Eurostat showed that eurozone GDP fell by -0.2% quarter-on-quarter in Q1 2026. Among more forward-looking indicators, the flash purchasing managers’ index (PMI) for the eurozone indicated that the downturn in activity in May eased slightly in June. The reading for June was 49.5, up from 48.5 in May (a reading below 50 indicates a contraction in economic activity).
UK
UK stocks, as measured by the FTSE All-Share index, gained in the quarter, although declines for the heavyweight energy sector capped overall progress. The top performing sectors included consumer discretionary, real estate and financials. Energy was the main laggard as oil prices returned to lower levels.
UK inflation, as measured by the consumer prices index (CPI), was 2.8% in the 12 months to end-May. This was unchanged from April’s level and still above target. The Bank of England kept interest rates steady at 3.75% throughout the quarter although two policymakers voted for an increase to interest rates at its June meeting.
Poor local election results in May put pressure on Prime Minister Keir Starmer. He announced his resignation as Labour Party leader after a by-election victory for key rival Andy Burnham, who is expected to become prime minister in July. However, markets showed little reaction to the political changes.
Japan
Japanese equities delivered robust returns in Q2 with the Topix Total Return index up 14.4% and the technology-heavy Nikkei 225 index up over 37%. Investor sentiment was lifted by receding Middle East tensions following the US-Iran ceasefire memorandum which saw oil prices decline. Stocks also drew support from broadly in-line monetary policy outcomes from both the Fed and Bank of Japan. The latter raised its policy rate by 25bps to 1.0% in June. The yen continued to be weak over the period, reaching a near 40-year low versus the dollar. The currency weakness provided support for exporters.
AI/semiconductor-related stocks and financials outperformed, though valuation concerns and profit-taking in AI names introduced intra-month volatility in June. The quarterly earnings season revealed wide dispersion across sectors and companies. Stocks with strong results and outlooks performed well, while weaker guidance was generally punished.
Emerging markets
Emerging Markets rose sharply in Q2 2026, ending markedly ahead of the MSCI World, and posting their strongest absolute quarterly performance since 2009. Performance was dominated by the technology orientated markets of Korea and the Taiwan region, driven by strong gains in memory and semiconductor stocks benefitting from continued AI demand, with returns increasingly concentrated in a narrow group of AI beneficiaries. Markets also judged the Middle East conflict’s broader impacts to be contained, while the signing of a fragile US-Iran peace agreement helped ease some geopolitical concerns.
Korea was the standout performer in the quarter and was the EM index’s top-performing market by some distance, as it rallied sharply to all-time highs boosted by outsized returns in memory and AI related stocks. Korean companies delivered strong earnings and EPS revisions, while increased domestic buying also contributed to the market rally. It was a similar story in the Taiwan region, which also posted strong performance in the quarter, with MSCI Taiwan reaching all-time highs. This was driven by strong Q1 earnings from technology stocks as sustained US hyperscaler capex continues to benefit the north Asia hardware supply chain. The smaller markets of Hungary and Egypt also outperformed over the quarter, but the remaining EM markets lagged the broader index, reflecting the narrow leadership seen in the quarter as performance has become increasingly driven by one factor: AI.
Despite posting positive double-digit returns in US dollar terms, India lagged the broader index as the country’s IT services sector continues to be seen as at risk from AI. Towards the end of the quarter, the market was buoyed by a sharp decrease in the oil price, with Brent falling to USD73, helping to alleviate inflation concerns and supporting investor sentiment. Poland, the UAE, Mexico, Chile and Kuwait all lagged the index despite posting positive absolute returns in US dollar terms. South Africa underperformed, driven predominantly by the sharp sell-off in mining stocks amid weakness in commodities and precious metals, while Saudi Arabian equities fell against a backdrop of subdued oil output and regional risk. Onshore China lagged against a backdrop of mixed economic data, weakness from internet stocks and less direct exposure to the AI-driven rally that dominated this quarter. Brazil was one of the largest underperformers, with sentiment deteriorating as polls showed President Lula establishing a lead over opposition right-wing senator Flavio Bolsonar in the October presidential election race. The central bank cut rates as expected but the cycle is likely to be shallow in the face of persistent inflation. Indonesia was the worst performing market in EM remaining under pressure from a possible MSCI downgrade to frontier status, with the decision delayed until November. Policy uncertainty, foreign equity outflows and weak investor confidence also weighed on the market. The central bank raised rates twice in June to protect the currency amid balance of payment concerns.
Asia ex Japan
The MSCI Asia ex Japan Index rose 27.7% in the second quarter of 2026 (in US dollar terms). The rally was driven by a combination of AI-linked export growth, semiconductor cycle acceleration and a global risk-on sentiment, although performance was highly concentrated in a few markets.
The region benefited from its central role in the global AI supply chain, particularly in semiconductors, advanced electronics and precision manufacturing. At the same time, improving global growth expectations, easing geopolitical tensions and relatively stable financial conditions supported capital inflows into emerging Asian equities. The index gains were heavily skewed towards North Asia, while several ASEAN markets lagged.
The standout performer by a wide margin was Korea. The country’s memory chip and advanced component manufacturers benefited from a sharp upcycle in AI-related demand, particularly for high-bandwidth memory and advanced fabrication. The Taiwan region also had a strong quarter, with gains led by its advanced semiconductor foundries and chip design ecosystem leaders that benefited from sustained capital expenditure by global hyperscalers. The Indian stock market rose modestly, with the increase driven by strong domestic demand, steady financial sector performance and signs of an improvement in corporate earnings following several weaker quarters.
Indonesia lagged because of weaker sentiment about commodities, softer external demand conditions, and the country’s limited participation in the AI-driven export cycle. Onshore China also underperformed, as investors remained cautious amid ongoing property sector stress, uneven domestic demand and policy uncertainty.
Global bonds
Overall Q2 2026 was a positive quarter for global bond markets although volatility remained elevated. The Middle East conflict remained in full focus, with the direction of bond yields tracking energy markets extremely closely. As escalation fears intensified mid-quarter, government bond yields rose to multi-year highs before reversing on encouraging signs of a potential US-Iran agreement.
Performance diverged across global government bond markets. Japan and the US underperformed overall, while within the eurozone Germany lagged non-core and peripheral markets, with Greece the strongest performer.
Central banks were cautious but increasingly alert to renewed inflation pressure. The Federal Reserve (Fed) left its target rate range unchanged at 3.50%–3.75% during the quarter, maintaining that policy was sufficiently restrictive. Kevin Warsh was approved as Powell’s successor, chairing his first meeting in June.
The US Treasury curve flattened, as yields rose in shorter maturities but fell slightly at the longer-dated end of the curve. Stronger-than-expected data reinforced expectations that monetary policy would need to remain restrictive. The rise in non-farm payrolls exceeded expectations and the overall resilience of the labour market supported the view that the US economy could absorb higher energy prices better than feared.
In June, the European Central Bank (ECB) raised rates by 25 basis points, taking its main policy rate to 2.25%. Revised projections showed higher inflation assumptions and weaker growth, while President Lagarde stressed that policy remained data-dependent and not on a pre-determined path.
UK gilts were influenced by both global inflation concerns and domestic politics. In April, the 10-year gilt yield reached its highest level since 2008, reflecting the inflationary consequences of higher energy prices as well as concerns over fiscal and political vulnerabilities ahead of local elections.
Keir Starmer resigned as prime minister in June and Andy Burnham (former mayor of Greater Manchester) looks likely to replace him by mid-July. The apparent avoidance of a more drawn-out leadership campaign was positive for gilts. Meanwhile, the Bank of England kept the base rate unchanged at 3.75%, stating that easier labour market conditions and weaker economic growth should help contain underlying inflation pressures despite risks from higher energy prices.
Elsewhere, the Bank of Japan raised its policy rate by 25 basis points to 1.00% in June, its first increase since December. Policymakers signalled that further tightening was possible, particularly if inflation continued to deviate above the 2% target. This reinforced the broader global theme of central banks becoming less willing to look through inflation shocks, even as growth risks increased.
It was a positive quarter for corporate bond markets, with both the US and European investment grade corporate bond markets generating positive returns and outperforming equivalent government bonds. Market volatility, when it came, was driven more by interest rates and macro uncertainty rather than by any clear deterioration in corporate fundamentals and wider spreads retraced as investors continued to find value in all-in yields. On the supply side, primary market activity remained robust, supported by refinancing needs and AI-related capital expenditure.
Commodities
Commodities fell in the quarter with the S&P GSCI index down 11.4%. Energy and precious metals both declined sharply. Oil prices fell as the US and Iran agreed a ceasefire during the period, although the shipping of oil and other commodities via the Strait of Hormuz is still well below pre-conflict levels. Gold and other precious metals came under pressure amid rising inflation expectations, which make return-generating assets such as government bonds more attractive.
The agriculture component was also weak, although cocoa outperformed. Industrials metals were little changed for the quarter, amid gains in copper and zinc.
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