Key takeaways:
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Concentration is not a reason to be bearish but to reflect on what the market is depending on. Earnings season will be an important test on whether the narrow group carrying the market can keep doing so at the pace expectations now require.
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The second half likely requires AI spending to translate into earnings growth across the market and proof that credit can absorb another wave of supply without spreads giving way.
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Until these can be confirmed, our preference is for quality through dividend growers, free cash flow compounders and second-order beneficiaries in electrification, industrials and select software over the most capital-intensive parts of the value chain.
Risk assets have to earn the second half
The best half in recent memory may have just raised the bar for everything that follows as Q2 earnings ramp up in earnest.
Taking stock of H1 2026
Investors navigated a geopolitical crisis, an oil price shock, a hawkish repricing of Fed expectations, and a wave of corporate debt issuance that looks to break historical records. At various points, the inflation narrative looked like it was accelerating, the consumer looked like it was cracking, and the tech trade looked like it was peaking. June alone delivered a ~15% selloff in U.S. software stocks, a move higher in front-end rates, and a U.S. jobs report that showed a sharp slowdown in hiring.
And yet the S&P 500 finished the quarter up close to 15%, the Nasdaq advanced more than 20% and the Philadelphia Semiconductor Index posted its best quarterly performance on record at 88%. Every major fixed income asset class finished in the green, with emerging markets the standout and credit spreads at levels not seen since before the GFC.
By the numbers, it was one of the best halves in recent years, but it rarely felt that way. The second half sets up with a more demanding backdrop as markets may have priced much of the good news even as the outlook remains resilient.
Limited cushion for comfort
Markets did not deliver those robust returns by taking less risk. They delivered them by absorbing more of it than most people thought possible, and in doing so, they have left themselves with less margin for error.
Consider credit. U.S. investment grade absorbed more than $1.3 trillion of gross supply in the first six months of this year alone, well above the pace seen in recent years. July expectations are for another $150 billion. Yet spreads sit near historical tights, including high yield and emerging markets alike. The same dynamic is playing out in equities, where valuations have risen in lockstep with earnings expectations, leaving the market priced for further execution rather than any meaningful disappointment.
Even in a benign scenario where equities continue making new highs, credit may struggle to rally further from these levels as supply challenges demand, a dynamic that would expose lower-rated issuers to a refinancing headwind that current spreads are not fully pricing. Fatigue is already visible at the margin as new concessions have widened, deal subscriptions have weakened, and hyperscaler-related issuance has underperformed in secondary trading.
The first half worked because the shocks arrived one at a time. A geopolitical crisis here, an inflation scare there, a hawkish Fed repricing somewhere in between. Each was digested before the next one arrived. The second half may not be so accommodating. The pipeline of potential disruption, from a Fed that remains data-dependent with a hawkish bias, a European winter gas supply picture that remains uncomfortably tight, a record issuance calendar that shows no sign of slowing, and potential for Korean contagion risks, does not resolve itself quietly.
Oil spiking more than 15% last week on US-Iran escalations is a reminder of how quickly risks can materialise and directly complicates the margin tailwind from energy that supported first half results.
The room for error that carried markets through the first half has been largely spent.
Concerns over concentration
The first half’s extraordinary returns were not broadly earned. Technology and semiconductor companies are expected to generate nearly 60% of S&P 500 earnings growth in Q2, with consensus penciling in ~24.7% year-over-year EPS growth for the index, the highest expectation heading into a quarter since 2021. The top ten stocks are expected to account for most of that growth. Strip away the current spending cycle and some measures suggest the underlying economy is already losing momentum.
Last week illustrated the tension as early Q2 reporters delivered a ~88% beat rate, with bank earnings broadly strong. Yet the Philadelphia Semiconductor Index fell nearly 10% as investors questioned whether AI-related valuations remain justified – board beats and sharp selloffs in the same breath.
A similar dynamic is visible in Europe, where headline Q2 EPS growth of around 12% is largely an energy story. Strip that out and underlying growth is closer to 3%, though AI-exposed names and capital goods are emerging as secondary contributors, with the latter benefiting from front-loading ahead of potential supply chain disruption that is now showing up in earnings commentary at levels not seen since the early pandemic.
That concentration is not a reason to be bearish, but to reflect on what the market is depending on. Earnings season will be an important test on whether the narrow group carrying the market can keep doing so at the pace expectations now require.
There is a more encouraging read available. The bar for the median S&P 500 company appears low, making headline beats a greater possibility this quarter given a macro backdrop that remains resilient. Input cost pressures may also ease as energy prices fall with oil finishing the quarter down more than 30% to below $70 a barrel – a direct tailwind for margins across industrials, consumer discretionary and transportation.
The conditions for earnings beats are in place, and the market is broadening just as H2-2026 begins. Whether that broadening in earnings arrives fast enough to reduce dependence on the leaders is the question earnings season will start to answer.
As AI drives most of the market’s returns, are investors being rewarded for picking winners or for being exposed to a handful of names? That’s the tension at the core of our Midyear Global Investment Committee Outlook, what we call the concentration paradox.
What the second half requires
We remain constructive on risk through year-end. The Fed looks set to hold in July and policy is unlikely to tighten from here, a backdrop that can remain supportive for both equities and credit. In Europe, the full year earnings picture looks more constructive, with EPS growth forecast in the mid-teens and second half profit growth expected to pickup, giving the diversification case a forward-looking foundation with a helpful valuation story.
How this translates into portfolios
Constructive is different from complacent. The second half likely requires AI spending to translate into earnings growth across the market and proof that credit can absorb another wave of supply without spreads giving way. And for consumers’ resilience to hold as savings rates normalise and the energy tailwind eases.
Until these can be confirmed, our preference is for quality through dividend growers, free cash flow compounders and second-order beneficiaries in electrification, industrials and select software over the most capital-intensive parts of the value chain. Outside the US, European banks, defense and industrials offer diversification, while emerging market opportunities remain focused on supply chain beneficiaries and improving governance stories. In credit, selection matters more than spread exposure at these levels and amidst greater dispersion.
The first half was extraordinary. The second half has the ingredients to match it. But it will have to earn it.
[*As of 31 March 2026]
