The tide comes in

When the second quarter began, investors were confronting an uncomfortable combination of rising inflation and slowing economic growth. Thankfully, by the time it ended, the picture had completely shifted. The MSCI World index gained 13.5% during the quarter, its best performance since 2020. The quarter was shaped by three distinct developments, each of which carries implications for the rest of the year. 

The first was corporate earnings. Companies reporting first-quarter results in April did so against a backdrop of genuine uncertainty. What emerged, however, was better than anticipated results from a broader set of sectors. Semiconductor manufacturers and the large platform companies at the centre of the artificial intelligence build-out reported results that exceeded already elevated expectations. The capital expenditure commitments underpinning AI infrastructure showed no sign of moderation. Technology bellwethers were joined by industrial, consumer discretionary and financial companies in posting upside surprises. 

The second was the potential resolution of the immediate crisis in the Middle East. The signing of the Memorandum of Understanding and the gradual reopening of the Strait of Hormuz removed the most acute source of inflationary pressure for the global economy. Brent crude fell nearly 40% over the quarter, its steepest decline since 2020. The effect was felt across asset classes. Inflation expectations fell. The case for precautionary interest rate rises weakened. Consumer confidence, squeezed by months of elevated energy costs, began to recover.  

The third development was less welcome. The Federal Reserve's June meeting produced a hawkish revision to its rate projections, with nine of nineteen policymakers now anticipating a rate rise before the end of the year. Gold fell 14% over the quarter, its worst performance since 2013. The yen sank to a forty-year low against the dollar. In fixed income markets, the improvement in longer duration bonds that had accompanied the fall in oil prices was partly unwound as markets adjusted to the prospect of higher rates for longer. 

Markets 

The scale of Asian equity market gains this quarter marks a shift in how the region is perceived by investors. Asian equities rose 27.4% for the quarter and are up 28.1% this year. South Korea and Taiwan are now the dominant country allocations in Asian benchmarks, a position that reflects their central role in supplying the components on which the global AI investment cycle depends. Japan rose 11.5% for the quarter, supported by a weak yen, continued progress on corporate governance reform and its deep integration into the semiconductor supply chain.  

US large cap equities were up 14.8% for the quarter. The more notable development, however, was the performance of smaller companies. US small caps rose 21.2% as falling oil prices and improving financial conditions raised confidence that the domestic economy would avoid a serious downturn.  

European equities gained 12.3%, a reasonable result given the continent's underexposure to technology. The United Kingdom was more mixed. Large caps gained 4.0%, hampered by a relatively modest technology weighting, while mid-caps recovered 9.8%. Both have lagged global peers significantly on a year-to-date basis. 

Fixed income delivered a modest improvement. UK gilts gained 2.0% for the quarter but remain barely positive for the year. Global government bonds rose 1.2%. The gains that emerged in the early part of the quarter were partially reversed following the Federal Reserve meeting. Government bonds have again failed to provide meaningful insulation against equity market volatility, a pattern that has now persisted across several quarters. 

Outlook 

The fundamental conditions supporting equity markets have improved. Geopolitical risk has receded. Corporate earnings are growing strongly. The fall in commodity prices has materially reduced the probability of a further inflationary shock. Taken together, these developments represent a genuine and significant improvement in the outlook relative to where investors stood at the start of April. 

The difficulty is that equity markets have already moved to reflect improving conditions. What is required now is that conditions remain stable and continue to improve. We approach the second half of 2026 with greater confidence than we entered the first, but with a clear understanding that much of the good news has already been counted.

Fahad Hassan, CIO, Albemarle Street Partners

Source: Bloomberg, data to 30/06/2026