IN BRIEF
Inflation stayed the most important macro variable. Expectations were for higher inflation to persist, keeping central banks cautious and the policy reaction function in play. The Fed held rates steady, but markets increasingly priced the possibility of renewed tightening later in the year.
Earnings growth is robust and broad-based, led by technology (driven by AI capex). We witnessed a sixth consecutive quarter of double-digit EPS growth in the U.S., well above historical averages. This has been the third consecutive year in which strong earnings are driving market returns. Margin expansion is evident across most sectors, and revenue beats are supporting upside. Risks include geopolitical uncertainty and consumer weakness, but the overall outlook remains constructive.
In Q2, U.S. equities regained leadership versus other developed markets European equities, supported by exceptional earnings — particularly in tech — as well as strong performance across other sectors of the U.S. market.
The Fed’s June FOMC meeting was more hawkish than expected, with half of the members submitting responses now believing there should be at least one hike in 2026. The bar for raising is lower, conditional on incoming data. The ECB increased rates by 25bps to 2.25% due to energy-driven inflation, with further hikes possible if inflation broadens or the Middle East situation worsens.
Inflation is elevated and volatile, driven by energy shocks and supply disruptions. U.S. core PCE is projected at 2.8–3.0% for YE 2026, Eurozone at 2.2–2.4% and China at 0.4–0.6%. Wage growth is moderating, and no broad-based inflation re-acceleration is expected absent new shocks. Risks are primarily energy-driven, and central banks are cautious about aggressive tightening.
The 10-year and 30-year U.S. Treasury yields peaked at around 4.7% and 5.2% respectively, but retraced relatively quickly as optimism about a peace deal in the Middle East returned. Credit markets remained relatively resilient, with investment-grade and high-yield spreads staying relatively tight. In the aftermath of the Middle East conflict, gold lost some of its allure.
The broader Q2 message was that volatility is not the enemy — unmanaged risk is. Periods of exaggerated price movement can create opportunity. The practical implication for advisors was to keep portfolios diversified, avoid over-anchoring on a narrow set of leaders and stay alert to the macro variables that can reprice quickly — especially inflation and geopolitics.
As we continue to focus on innovation, late last year we enhanced the precision with which we target our highest-conviction equity ideas through our Equity Completion Funds — building on five years of successful implementation for our U.S. clients. This approach has proven particularly valuable in the current environment, enabling us to tactically capture opportunities across equity markets as they emerged during recent volatility, while preserving diversification and maintaining cost efficiency. During the quarter, we added to select laggards and trimmed overweights in names that performed well.
In portfolios with liquid alternatives, we favour less-correlated investments that may continue to benefit from elevated volatility within and across asset classes. Accordingly, we are increasing allocations to Relative Value (R/V) through the addition of a new strategy to our platform. This position was funded by reducing an existing diversified multi-manager strategy. During sporadic market sell-offs, alternatives contributed positively to portfolio resilience.
We are positioning our multi-asset portfolios with a moderately pro-cyclical tilt, holding a slight overweight in U.S. equities and a 2% overweight in U.S. and European high-yield bonds. We favor U.S. equities versus global peers on a compelling AI-driven earnings-growth outlook, supported by greater U.S. energy independence amid Middle East developments. Sector positioning balances high-quality growth and defensive areas with selective cyclical exposure. Technology has led earnings, and key overweights include semiconductors, hardware and select software; pharmaceuticals and life sciences; U.S. entertainment; diversified banks in the U.S. and Europe and European telecoms.
Portfolio risk is expressed through multiple smaller, well-diversified tilts — avoiding concentrated beta while retaining flexibility. Our moderately pro-risk stance combines the U.S. equity overweight with carry. In fixed income, we underweight core bonds in favor of high yield, keep duration neutral around 6.2 years, and remain modestly overweight credit despite tight spreads, supported by solid fundamentals and attractive risk-adjusted valuations.
For portfolios that include hedge funds, allocations remain aligned with our strategic targets, with a deliberate tilt toward relative value and equity long/short — strategies that have historically added value during periods of elevated dispersion.
Following the March sell-off triggered by the escalation of conflict in the Middle East, Q2 delivered strong returns across risk assets. The U.S. market declined less in March and rallied more than Europe in the aftermath as the U.S. dollar strengthened — supported by “U.S. exceptionalism” sentiment.
On a relative basis, several of our positioning decisions added value. Our overweight to equities — particularly U.S. equities — was a positive contributor. AI-related names in Korea and Taiwan provided an additional boost. Our high-conviction U.S. financials and healthcare positions lagged, while European banks, telecoms and German industrials contributed positively. High yield also added to performance, and we continue to see value in the asset class over the medium term.
Notably, portfolios that included hedge funds or liquid alternatives outperformed those without in absolute terms, reinforcing the benefits of diversification in volatile environments.
Our outlook remains constructive but risk-aware. The cycle is supported by resilient corporate earnings — particularly where strength is tied to AI capex and broader margin discipline — which we expect to keep equities biased higher, even if leadership rotates and market breadth improves. On the macro side, oil remains the key swing factor: any normalisation following Middle East de-escalation would ease inflation pressures and support fuel-sensitive parts of the economy, while renewed disruption would risk an inflation shock.
Regionally, we prefer the U.S. and select EM over Europe. Within equities, we favour areas leveraged to earnings durability and the capex cycle, alongside financials and defensive healthcare, while maintaining diversification given geopolitical and rate-volatility risks.
We remain pro-risk, but diversified and disciplined: earnings support our positioning, while the Middle East conflict and its energy pass-through represent the single biggest threat to the outlook. Central banks are likely to remain wary of inflation risk in the near term. Until a more durable decline emerges, AI and commodities remain the two most important themes.
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
Indices are not investment products and may not be considered for investment.
Past performance is not a guarantee of future returns and investors may get back less than the amount invested.
Benchmark definitions
All index performance information has been obtained from third parties and should not be relied upon as being complete or accurate. They are not investment products available for purchase. Indices are unmanaged and generally do not take into account fees or expenses. Furthermore, while some alternative investment indices ay provide useful indications of the general performance of the alternative investment industry or particular alternative investment strategies, all alternative investment indices are subject to selection, valuation survivorship and entry biases, and lack transparency with respect to their proprietary computations.
MSCI WORLD INDEX: The MSCI World Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global developed markets. (Source: MSCI Barra)
MSCI EUROPE INDEX: The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 448 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. (Source: MSCI Barra)
MSCI JAPAN INDEX: The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 318 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. (Source: MSCI Barra)
S&P 500 INDEX: The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with 75% coverage (based on total stock market capitalization) of U.S. equities, it is also an ideal proxy for the total market. (Source: Standard & Poor’s)
STOXX Europe 600: The STOXX Europe 600 index represents large, mid and small capitalization companies across 17 countries of the European region.
NIKKEI 225: The Nikkei 225 is a price-weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange.
NASDAQ: The Nasdaq Composite Index is a stock index that conveys the overall performance of all Nasdaq-listed stocks according to market capitalization.
CAC 40: A broad-based index of common stocks composed of 40 of the 100 largest companies listed on the forward segment of the official list of the Paris Bourse.
DAX: The DAX is a German blue chip stock market index that tracks the performance of the 40 largest companies trading on the Frankfurt Stock Exchange.
MSCI EM: The MSCI Emerging Markets Index consists of 23 countries representing 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. (Source: MSCI)
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