Global stocks post best Q2 in six years amid AI boom, yen slump

Global stocks were headed for their best second-quarter performance in six years on Tuesday, while a resurgent ‌dollar pushed the yen to a four-decade low and was headed for a fourth straight quarterly rise.

Within the past three months, the Strait ​of Hormuz has re-opened gradually ⁠and haphazardly as hostilities between the US and Iran receded into a fragile ceasefire, knocking 20% off the price ‌of oil. In addition, a dramatic shift ‌in expectations for US interest rates has occurred, against a backdrop of a seemingly unstoppable boom in artificial intelligence stocks.

The MSCI All-World index has risen almost 14% to record highs in the last three months, marking its best second-quarter performance since 2020.

Most of the gains have been powered by a scorching rally in anything AI-related, particularly ‌in Asian markets, where indexes in Japan, South Korea and Taiwan have logged double-digit percentage gains. The S&P 500 is also up 14 per cent and the Nasdaq, which ⁠welcomed $2 trillion SpaceX to its ranks in June, has gained 20 per cent.

"The one theme that's disappeared largely is monetary policy support," said Guy Miller, chief market strategist at Zurich Insurance Group. "At the beginning of the year, the futures market was pricing further rate cuts. Now, that's changed. And that's been a function largely of the situation with Iran and the higher commodity prices." "The take-away for us, however, is that while we're not expecting further cuts from the central banks, we're not expecting a start of a hiking cycle as such." Europe's STOXX 600, which does not have nearly as many AI beneficiaries as many Asian or ​U.S. indexes, was up 1.1 per cent, heading for a quarterly gain of 10 per cent, having risen every month since March. US stock futures were up ‌between 0.1 per cent and 0.2 per cent, suggesting a modest increase at the opening bell later.

The dollar has been the standout winner this quarter in the foreign exchange market, gaining 1.4 per cent against a basket of major currencies.

Investors are amassing bullish positions at a record pace thanks to a remarkable re-pricing of the US interest ⁠rate outlook, which has flipped from cuts to hikes, due to the surprising strength of the US economy and persistent inflationary pressures beyond energy prices. The dollar's rise has driven gold to its largest quarterly fall in more than a decade, while the yen has been driven to its weakest point in 40 years to trade around 162.38 per ​dollar on Tuesday. ‌Traders were already on edge about possible Japanese intervention, with Finance Minister Satsuki Katayama issuing another warning.

The world's most influential central bankers are in the Portuguese ‌town of Sintra this week for the European Central Bank's annual meeting and no one will be more in the spotlight than new Federal Reserve Chair Kevin Warsh, who is scheduled to address the gathering on Wednesday.

Warsh's focus on inflation at his first meeting as head of the Fed earlier this month prompted traders to almost ‌fully price in the prospect ‌of a rate hike by October, but some economists believe the economy is ⁠strong enough, and inflation evident enough, to mean an increase could come as soon as July.

"Of all the major central ‌banks, (Fed policymakers) are probably the only ones where there's a plausible case that they could go in July, that they could hike to get it out of the way, in a way," said Isabelle Mateos y Lago, BNP Paribas group chief economist.

"That's not our ⁠base case, but there's a very meaningful probability that they might want to do that and really kind of get it out of ​the way and move on." But before Warsh's appearance, there is an array on Tuesday of European inflation reports, as well as US consumer confidence data for June and the monthly hirings and firings JOLTS report, as the clock ticks down to Thursday's US monthly jobs report.

Meanwhile the US stock market faces a gauntlet of tests to keep its rally going in the second half of 2026, from the sustainability of AI spending to a high ‌corporate earnings bar and the outlook for interest rates under a Federal Reserve with a new chairman.

The benchmark S&P 500 has climbed more than 8 per cent ​so far this year, extending ⁠its bull run well over three years, while the technology-heavy Nasdaq Composite has increased by 11 per cent. But investors have shown ‌signs of unease recently, with those indexes pulling back ‌in June.

Massive spending on AI infrastructure has been at the heart of the market's rally, bolstering profit estimates for a wealth of companies. Five companies including Microsoft, Alphabet and Amazon are forecasting combined capital expenditures of ‌about $730 billion this year, according to JPMorgan.

"It is certainly priced in to the market that the level of capex that we're seeing will continue for the foreseeable future," said ⁠Nicolas Janvier, head of North American equities at Columbia Threadneedle Investments. Some investors are wary that hyperscalers need to show sufficient returns on their spending. In the meantime, AI-driven optimism has sparked sharp gains in semiconductor shares, while also driving other tech stocks, industrials and energy shares tied to the buildout and powering of data centers.

"The risk from the market's perspective is the technicals are so crowded within those trades that anything that starts to sow some seeds of doubt in the narrative and you are at a somewhat vulnerable position," said Garrett Melson, portfolio strategist with Natixis Investment Managers Solutions.

A robust first quarter ​for US corporate results has driven equity performance and profits are expected to stay strong going forward, with S&P 500 earnings expected to rise ‌by over 26 per cent in 2026, according to LSEG IBES.

Reuters