Q2 Multi-Asset Perspectives:

08 July 2026

Review

The second quarter of 2026 saw an extremely strong return of 15.3% in global equities as measured by the MSCI AC World Index in local currency terms. Whether this outcome was incredible or unsurprising depended largely on your market perspective. Incredible for those noting the war in Iran and its effect on the Strait of Hormuz and Brent crude oil, which exceeded USD 110 per barrel in April before settling at a still-elevated USD 73 per barrel by the end of June¹. US CPI inflation correspondingly exceeded 4% in May, thanks to the associated surge in energy costs, over two percentage points higher than the US Federal Reserve’s (Fed) mandate. Consumer confidence, as measured by the University of Michigan, unsurprisingly slumped.²

But this battering of America’s consumer economy barely touched the one theme that continues to bulldoze everything before it – artificial intelligence (AI), of course. Strong first quarter corporate earnings from the technology (tech) sector at the epicentre of the AI revolution suggested this wasn’t a re-run of the speculative late 1990s tech boom, though SpaceX’s successful IPO late in the review period pointed to almost speculative demand for inspiring tech-based narratives by retail investors, in our view.

The reality is that the real US economy has been increasingly re-focused on a new industrial base in the form of data centres, automation, aerospace and defence. The US stock market has broadly correctly reflected this new economy, with tech and industrial stocks leading performance and consumer discretionary stocks lagging. Away from the US, the AI theme remained ever-present. Emerging market equities performed exceptionally well, with the MSCI Emerging Markets Index returning 24.1% during the quarter versus 14.9% for the MSCI AC World Index³. Performance was supported by a slightly weaker US dollar, but also by tech manufacturing powerhouses like Taiwan and South Korea becoming so instrumental in global semiconductor and memory chip production. Japanese equities also fared well, thanks to being a key provider of the machinery needed for AI infrastructure, as well as the on-going shareholder-focused story and political stability in the light of the landslide election earlier this year⁴.

Europe lagged somewhat amid the stagnating German economy and persistent industrial competition from China. Volkswagen announced 100,000 job cuts during the quarter.⁵ Towards the end of the review period the European Central Bank (ECB) raised interest rates to 2.25%⁶ in an effort to curb rising inflation, a move many commentators warned could repeat the infamous monetary policy mistakes made during the global financial and eurozone crises of 2008 and 2011 respectively.

Chart 1: Investment up, consumption down – Q1 GDP reflects the industrial economy:

Contributions to US real GDP growth, % change year-on-year (31 Dec 2011 – 31 March 2026)

Outlook

The burning question for many investors, analysts and commentators today is whether we are in some kind of AI- and tech-fuelled bubble that is about to burst and send the market into a generational correction. The future is, of course, impossible to predict, but there are some differences between today and its closest precedent, the late-1990s tech boom. For a start, corporate earnings now appear to be in strong shape, with Wall Street predicting S&P 500 earnings growth of a breathtaking 23% year-on-year⁷. The AI hyperscalers (large cloud and AI infrastructure companies) may spend close to USD 800 billion on infrastructure this year⁸, but they are also generating a huge amount of money. Anthropic alone reported an annualised revenue run rate of USD 30 billion in April (up from USD 1 billion in January 2025)⁹, while OpenAI reported annualised revenue of ‘just’ USD 25 billion¹⁰. Both companies could potentially list soon towards the end of this year.

Furthermore, valuations for the broader S&P 500 are just not as stretched as they were in the late 1990s. Just over three and a half years after the Telecommunications Act of 1996 and the launch of ChatGPT in 2022 (9 September 1999 and 30 June 2026, respectively), the S&P 500’s forward price-to-earnings ratio stood at 25.8x and 21.9x. There has been an important shift in the demand base supporting equity markets. According to JPMorganChase Institute, about one-third of 25-year-olds held investment accounts in 2024, up six-fold from 2015.¹¹

This is not to guarantee progress in markets will be as strong and linear as it has been in the last few months. There will inevitably be some earnings disappointments along the way and governments could seek to regulate and tax the providers of AI as it creates winners and losers like all technologies before it. The Pope’s recent encyclical on preserving the dignity of humanity in the event of mass job displacement serves as a warning that this immensely powerful tech is unlikely to be monetised at the expense of all other considerations.

Another risk remains geopolitics and their inflationary consequences. At the time of writing, another deal to end the war with Iran had been signed. Time will tell whether it holds and how quickly energy markets can stabilise, but central banks are on alert for rising inflation (as evidenced by recent actions and commentary from both the ECB and the Fed). Any tightening of monetary policy could present a risk to market progress. Whatever the next few months hold, investors in the meantime can take advantage of currently benign markets to review their suitability rationales and tighten up the diversifiers in their portfolios. At some point, the latter might - finally - be needed.

Chart 2: Labour’s loss – direct AI regulation and taxation could be coming:

Compensation and wages as a percentage of US GDP (1 January 1947 – 1 January 2026)

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.