1.1 War and Peace, AI and semis, the Fed and Trump, expectations more than profits 

Before investors complain about the turbulence in financial markets over recent months, they should briefly remind themselves of the dire consequences of the U.S. and Israeli attack on Iran for the people of the Gulf. For them the big worries are more existential than whether a prolonged closure of the Strait of Hormuz could lead to U.S. stagflation. But in the markets the stagflation threat and the question of whether the capital requirements of AI providers might affect equity returns were probably the two big themes of the second quarter. Particularly in April and May, relief over the absence of further escalation in the Middle East, combined with a steady stream of new growth announcements from the AI universe, provided supportive conditions for a rally, especially in technology stocks. This occurred despite steadily rising U.S. Treasury yields, which would normally be a headwind for growth stocks.

June then became a period of consolidation for the markets. In U.S. politics, attention shifted from Iran to the renovation of the Reflecting Pool in front of the Lincoln Memorial, while bond markets focused on understanding the new President of the U.S. Federal Reserve (the Fed), Kevin Warsh. Following the press conference after his first Federal Open Market Committee meeting, investors concluded that Warsh was serious about the Fed’s inflation-fighting mandate. Not least because he did not cut interest rates, something that did not provoke a public reaction from the U.S. President who had just appointed him. At the short end of the yield curve, yields moved higher as markets began to price in one to two rate hikes before year-end, while long-term yields fell as investors viewed longer-term inflation risks as more contained. However, by month-end, ten-year yields moved back towards 4.5% on the back of strong labor market data.

No review of June would be complete without mentioning the record-breaking USD 85.7 billion initial public offering (IPO) of Elon Musk’s technology conglomerate, SpaceX (rockets, satellites, internet and AI), which made its founder the first dollar trillionaire in history. Still loss-making and valued at roughly 60 times estimated 2026 sales at month-end, the company is certainly testing the hopeful imagination of investors. The IPO, however, was a success, which likely helped equity markets navigate the month despite growing doubts about the business models of some AI companies.

1.2 Semiconductors rise at the expense of hyperscalers; oil, gold and bitcoin decline

The semiconductor-heavy South Korean Kospi 100 and the Philadelphia Semiconductor Index (SOX) both gained almost 90% during the second quarter, while hyperscalers continued to lose favor in equity markets, as illustrated by the Magnificent 7’s nine percent decline in June. Another notable feature of June was the relative catch-up performance of second-tier equity indices. The Euro Stoxx 50, Stoxx Europe 600, Switzerland’s SMI, and the small-cap Russell 2000 were among the best-performing indices. At the other end of the spectrum, the MSCI China was the weakest performer, falling seven percent.

Also noteworthy were the weak Japanese yen (JPY), which fell to a 40-year low against the U.S. dollar (USD/JPY low is 162), and the sharp decline in oil prices. Brent and WTI crude both lost around a quarter of their value during June thanks to hopes that the Iran-U.S. peace talks were heading somewhere. Gold and Bitcoin were also victims of these talks. Gold was fluctuating at around the USD 4,000 per troy ounce level at month-end, while Bitcoin fell below USD 60,000. Gold has now lost roughly a quarter of its value compared with its historic high at the end of January, while Bitcoin has fallen by more than half from its record peak in October 2025.

The summer holiday season is approaching and in some respects the market weather might look good for investors.  The historical pattern favors those who take their summer break early. The S&P 500 has posted gains in July for eleven consecutive years. And in the last 30 years July has delivered positive returns on average (both for the S&P 500 and the Stoxx 600). In August and September, however, the market weather generally changes: these two months have, on average, generated negative returns.

It goes without saying that the historical pattern might not prevail this summer. Overall, the outlook is not unfavorable. The global economy is growing slowly and steadily, while the headwinds from the Iran war, higher oil prices and higher interest rates have calmed, even if they have not entirely disappeared. However, though markets performed quite well in the second quarter, June also demonstrated just how nervous they are when it comes to AI. Fears about growth and margins in AI and the technology sector could combine with worry about the bond market if longer-dated Treasury yields continue to be elevated, and this combination could easily become dangerous and lead to a summer storm.

2.1 Fixed Income

In June, the European Central Bank (ECB) delivered its first rate rise in response to inflationary pressures stemming from the Iran war, and the Bank of Japan implemented another rate increase, while both the Fed and the Bank of England remained on hold. We expect more of the same: an additional rate move from the ECB in coming months while the Fed stays on hold until next year. We view the statements of the new Fed Chair, Kevin Warsh, as less hawkish than the market believes. He has indicated that he would prefer to guide markets less and leave them to interpret economic conditions on their own. Nonetheless, we can also imagine the Fed responding more quickly to any major change in economic circumstances.

We made no tactical changes to our assessment of the various fixed-income asset classes in June. We retain a positive view on U.S. Treasuries because we do not share the market’s view that further rate hikes are forthcoming, and we consider German Bunds fairly valued. Given the (from a historic perspective) extremely tight credit spreads on USD and EUR corporate bonds, we remain neutral across the segment, with the exception of European investment-grade bonds, which we view favorably.

Currencies

In currencies, we moved EUR/USD back to neutral. In our view, stronger economic momentum in the United States is supportive for the dollar, as is the change in Fed leadership. Concerns that Kevin Warsh might quickly deliver rate cuts to accommodate the U.S. President have subsided, at least for now.

2.2 Equities

We are focusing less on regions in our equity market assessments and more on sectors, and, within them, subsectors, as we see considerably more potential for market mispricing at that level.

Given the continued favorable outlook for corporate earnings growth, the conditions for equities remain supportive in our view. However, we also observe a certain degree of nervousness about the sustainability of high earnings, particularly in cyclical sectors. One sign of this is declining valuation multiples, as earnings estimates have risen more strongly than share prices. But valuations can still not be described as historically cheap.

Our medium-term outlook remains optimistic, but we have implemented several changes at the subsector level in the short term. We have downgraded the semiconductor sector to neutral. We still view it as the primary beneficiary of the AI boom, but after gains of around 90% in the SOX during the second quarter we are becoming somewhat more cautious in the near term. It remains a cyclical sector that, after initially maintaining strict capital discipline, is now preparing to expand capacity significantly, tapping capital markets heavily for funding. In addition, there remains a non-negligible risk that hyperscalers could reduce their spending if the monetization of AI investments advances more slowly than expected. In line with our view on semiconductors, we have also downgraded emerging markets to neutral, given their strong exposure to the sector through South Korea and Taiwan.

Software, too, is part of the broader technology sector, and we retain a cautious view on it because of the ongoing disruptive pressure from AI, even though we see significant dispersion within the industry; some software companies are actually benefiting from AI.

The financial sector is also becoming more interesting beneath the surface. Another consequence of AI-related disruption is that we now hold a negative view on financial services companies, which includes exchanges, online brokers, credit card providers and investment banks. By contrast, we retain a positive view on banks, which in the United States are supported by deregulation, in Europe by rising returns on equity and in Japan by increasing net interest income.

Due to its strong dependence on the prospects for the oil price, we have downgraded the energy sector to a negative view. We believe the oil shortage seen during the first half of the year could soon turn into oversupply.

2.3 Alternatives

The sustainability of the ceasefire between Iran and the United States is very much open to question. But the breakout of (relative) peace has already had a significant impact on commodity markets and has also influenced our assessments.

Gold

We have become tactically more cautious on gold. One reason is, once again, the change in Fed leadership, which has reduced medium-term inflation concerns among many investors. At the same time, however, we believe that continued central bank demand should provide ongoing support for the gold price and therefore expect gold to consolidate at current levels for the time being.

Oil

We have moved oil back to neutral because, though risks remain, we do not expect supply disruptions to become as severe again as they were at the beginning of the Iran conflict. At the same time, OPEC is losing influence, while oil production outside the Gulf region is expanding. Over the medium term, we expect Brent crude to trade between USD 70 and USD 80 per barrel. Once inventories have been rebuilt, prices could fall below that range.