June Wrap Up: Taking stock of global markets at the midpoint
15 July 2026 / Published in Your Money"Whoa, we're half way there, Whoa oh, livin' on a prayer"
We are half way through the year and, despite the Iran Crisis, share markets have been strong, driven by truly spectacular returns in hardware stocks supporting the AI buildout. It's not just AI driving markets. The more growth sensitive parts of the market, smaller companies and value stocks, have also been strong supported by reshoring of supply chains and increased labour productivity. Building portfolios balanced between these themes, and not over extrapolating first half strength in the hottest parts of the market, will, in our view, be key to delivering strong risk adjusted returns for the balance of the year.
Taking stock
It has been a roller coaster first half of the year; the almost daily AI headlines, the Iran conflict and an oil crisis, periods of market euphoria and periods of sharp volatility. With so much market noise it's worth taking stock, identifying the key drivers of returns and seeing what that might mean for positioning portfolios for the rest of 2026 and beyond.
Despite being volatile share markets have generally been strong over the year, although, as always, the headlines hide a lot of detail below the surface. For the record the MSCI World Net Index is up 10.9%, in New Zealand dollar terms, over the six months to 30 June 2026.
Three themes below the surface are worth drawing out.
We see headlines on this almost every day. AI has been a massive driver of returns over the year and has led to the market becoming very concentrated. JP Morgan identifies forty-one AI related companies in the US S&P 500 index, noting that they now make up almost 45% of overall market value. Michael Hartnett, Chief Investment Strategist at Bank of America Global Research argues that the stock market is the most concentrated in a single theme, AI in this case, in 150 years.
Yet even with the AI space, leadership has changed over the year from the AI spenders, the hyperscalers, like Amazon, building massive data centres and madly buying compute, to the AI earners, the firms providing that compute, in particular memory chip and data storage companies. The numbers are jaw dropping. The Philadelphia Semiconductor index, which measures share price returns on semiconductor stocks, is up around 95% so far this year. Returns for semiconductor stocks for the past six months are the strongest they have ever been, eclipsing massive rallies of the mid and late 1990s.
The third, and possibly less recognised theme, is strength in parts of the market typically more sensitive to economic growth, smaller companies and value stocks. While understanding precisely why this is occurring is more speculation than science, it seems to be a combination of reasonable valuations, continued strength in the global economy, supply chain onshoring trends and an early-stage positive productivity story.
Fixed income markets in many ways mirror these trends, with interest rates generally higher, resulting in pressure on near term returns. It is the combination of higher inflation, stronger growth and increased corporate issuance to fund the AI build out all pressuring rates.
The two market thesis
Jim Bianco of Bianco Research draws these themes together well in a recent piece he wrote entitled "Is the Stock Market two asset classes?" The key observation in his piece is the divergence in returns between the AI and non-AI related parts of the market.
In particular, Bianco has looked at the correlation between the Bloomberg AI adopters and enablers index, these are AI related companies in the US S&P 500 index, and the rest of the index. The rolling 126 day return correlation between the two has collapsed and stands around 0.3 in the last observation.
What does that mean? In short, and speaking to the question that Bianco posed, the AI and non-AI parts of the market are behaving almost like separate asset classes, with very different return drivers and different return profiles. They rise and fall to the beat of different drums.
This insight, and the incredibly strong rally in semiconductor stocks, has important implications, in our view, for building portfolios.
The first of these is that we should be naturally cautious of record-breaking market conditions, in either direction. As highlighted earlier, semiconductor stocks have had the best six month start to the year on record. While this doesn't necessarily mean that they are poised to fall from here, it does mean that expecting a repeat performance for the balance of the year would be a very brave call.
Bianco's insight provides an antidote to this. If indeed non-AI stocks are behaving like a separate asset class, then there are considerable diversification benefits from spreading risk away from an over reliance on AI stocks. The argument for doing this is further enhanced by the nascent labour productivity story, the mega trends driving onshoring of production and what is likely to be a more accommodative US Federal Reserve.
Rather than livin' on the prayer of continued AI strength alone, we prefer a more diversified approach, taking advantage of the dynamics of today's bifurcated market.
Frank Jasper
ASB Chief Investment Officer
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