Investment commentary – second quarter 2026

Markets spent much of the second quarter of 2026 wrestling with geopolitical tensions, volatile energy prices and shifting interest rate expectations. The escalation of conflict in the Middle East briefly reignited fears of a wider regional war, sending oil prices sharply higher and unsettling investors.

Yet by the end of June, the mood had completely changed. As fears of a prolonged disruption to energy supplies through the Strait of Hormuz began to ease, markets staged a relief rally. Investors became increasingly willing to look beyond the headlines and focus once again on corporate earnings and long-term growth opportunities.

Technology leads the way

That improvement in sentiment was most evident in the technology sector, which resumed its role as the dominant market driver. The overarching theme behind many of the best-performing funds in the quarter was continued enthusiasm surrounding artificial intelligence (AI) and the vast investment required to support it.

Emblematic of that optimism was Elon Musk's SpaceX completing the largest IPO in history, joining public markets at a valuation approaching $1.8trn. But while SpaceX grabbed the headlines, investors were increasingly focused on the broader ecosystem underpinning the next phase of AI adoption.

At its heart sits the semiconductor manufacturers powering the global AI boom. Companies such as Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and SK Hynix have been among the standout beneficiaries this year. Their dominant positions in advanced chip manufacturing and memory production have translated into strong earnings growth and rising investor demand, helping drive impressive returns from both technology funds and some Asia-focused portfolios.

Two sides of the same trend

Although appearing disparate, many of the quarter's best-performing funds were effectively riding the same wave. Whether it’s technology funds, Asian equity funds or emerging market portfolios, many shared significant exposure to the companies enabling AI development. 

Taiwan and South Korea were particularly strong performers, reflecting the importance of semiconductor manufacturing to their stock markets. The strength of these countries shows how the AI theme is broadening beyond the large US technology names.

Many of the names involved in cloud computing, digital infrastructure and the wider technology supply chain also continued to perform strongly. Robust results from Alphabet, Amazon, Microsoft and Meta reinforced confidence that businesses remain willing to spend heavily on AI capabilities, cloud services, and digital advertising, despite a more uncertain economic backdrop.

Outside technology, the picture was more mixed. Consumer-facing businesses remained under some pressure as households continued to grapple with higher fuel and food costs. Although labour markets remained relatively resilient, evidence began to emerge that households were becoming more selective in their spending decisions. 

Elsewhere, there were pockets of strength as smaller US companies enjoyed a revival, helped by signs that the world's largest economy remained more resilient than many had feared. The start of the first-quarter earnings season also provided reassurance that corporate profitability was holding up reasonably well, despite the challenging backdrop.

Commodities pull back

While equity markets generally finished the quarter in good spirits, albeit with the narrowing leadership of a small group of companies driving disproportionate returns, commodities were among the notable laggards.

Gold, which had benefited earlier in the year from central bank and retail investor demand, dipped further as government bond yields moved higher and sentiment improved around the Iran war and energy supply situation. Rising yields increase the appeal of income-generating assets relative to gold, which doesn’t produce income.

Oil also experienced a dramatic reversal. Prices were initially strong as fears grew over potential disruption to Middle Eastern supplies. However, as tensions eased and shipping through the Strait of Hormuz resumed, crude retreated sharply from its highs. The market increasingly focused on ample near-term supply and the prospect that the worst-case geopolitical scenarios would not materialise.

The weakness in commodity markets fed through to mining funds and resource-heavy regions. Latin American equity funds struggled as softer commodity prices weighed on investor sentiment. Chinese equities also endured a difficult period as concerns over domestic growth continued to overshadow broader improvements in global risk appetite.

Inflation concerns abate but not vanquished

It was a relatively lacklustre quarter for bond investors too. 

Although fixed interest markets recovered from their worst levels by the end of June, higher energy prices and concerns about inflation pushed government bond yields upwards for much of the period. Investors increasingly concluded that central banks may need to keep interest rates elevated for longer, if not hike them in the near term.

Looking ahead, markets appear to be in a better place than they were a month ago, but uncertainty remains high. Much depends on whether the recent improvement in sentiment proves durable and whether the calmer backdrop in the Middle East can be maintained.

Alongside geopolitics, the evolution of the AI investment theme is likely to remain one of the most important influences on market performance. So far this year, investors have favoured "picks-and-shovels" businesses supplying the infrastructure needed for AI, including chipmakers, cloud providers and data centre operators. The next stage of the story may be determining whether companies can convert that vast investment into tangible productivity gains and profit growth across the broader economy.

Top performing funds 

Whether technology or Asia-focused, many of the best-performing funds were riding the same wave: significant exposure to companies enabling AI development.

Bottom performing funds

Commodities came under pressure as Middle East tensions eased, oil fell back sharply, and demand for gold waned amid less safe haven demand and higher bond yields.

Top performing sectors

As fears of a prolonged disruption to energy supplies through the Strait of Hormuz began to ease, markets staged a broad relief rally. Tech and AI-linked areas were the clearest winners.

Bottom performing sectors

There was weakness in mining funds and resource-heavy regions, while Chinese equities endured a difficult period amid concerns over domestic economic growth.

Source for data: FE Analytics, 31/03/26 to 30/06/26, total returns with income reinvested. Past performance is not a reliable guide to future returns.