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The second quarter of 2026 marked a sharp reversal from Q1 turbulence, as renewed acceleration in artificial intelligence investment, easing geopolitical risks, and strong corporate earnings drove exceptional gains in global equities. Markets were led by outsized returns in a narrow group of high-beta momentum stocks primarily tied to the AI investment theme. Investors appear to be pricing in continued rapid growth in capital spending, despite uncertainty around the pathway to positive returns on investment. A second defining dynamic was the gradual de-escalation of the US-Iran conflict and the signing of a memorandum of understanding committing Iran to reopen the Strait of Hormuz. As Brent crude retreated sharply from Q1 highs, stagflation fears eased, and risk appetite recovered broadly. This provided a tailwind for bonds, particularly riskier emerging market and high-yield credit. The US dollar strengthened modestly on a trade-weighted basis, reflecting the tug-of-war between widening US interest rate differentials and fading safe-haven demand.
