Language | 
English
Spanish
The second quarter was defined by the ongoing conflict in the Middle East and intermittent negotiations between the United States and Iran. The conflict brought the Strait of Hormuz, a vital shipping corridor carrying roughly one-fifth of the world’s oil and gas trade, to the brink of shutdown. West Texas Intermediate crude surged above $110 per barrel in the first week of April before retreating below $70 by quarter-end, near pre-conflict levels. Nevertheless, the temporary spike in energy prices contributed to higher inflation expectations. Inflation is now projected to rise from 2.6% in 2025 to 2.9% in 2026 across developed economies, and from 4.2% to 5.2% in developing economies. As a result, central banks continue to balance the need to contain inflation against the risk of slowing economic growth.
Global growth forecasts have been revised modestly lower. The World Bank expects global growth to slow to 2.5% in 2026, with emerging and developing economies experiencing their weakest per capita income growth since the pandemic. The United States remains relatively well positioned, supported by continued investment in artificial intelligence, a resilient economy, and its status as a major energy producer. Europe and much of Asia remain more vulnerable given their dependence on imported energy and on shipping routes affected by the conflict. While the global economy has demonstrated resilience, the outlook remains dependent on continued stability in the Middle East.
Despite these geopolitical headwinds, global equity markets posted impressive gains during the quarter, rebounding from earlier volatility. Investor sentiment improved as corporate earnings generally exceeded expectations, inflation continued to moderate across many developed economies, and investors increasingly anticipated that central banks would maintain or gradually ease monetary policy. U.S. equities led the advance, driven by technology, communication services, and select industrial companies, while developed international and many emerging markets also delivered positive returns.
As geopolitical concerns eased and energy prices stabilized, market volatility declined and investor risk appetite strengthened. Technology and communication services remained the strongest performing sectors, supported by continued investment in artificial intelligence, cloud computing, and digital infrastructure. Industrials and financials also performed well, while energy stocks remained volatile as oil prices fluctuated throughout the quarter. More defensive sectors, including utilities and consumer staples, generally lagged as investors favored higher growth opportunities.
In fixed income markets, inflation concerns remained the primary driver of bond yields. Market expectations shifted from anticipating interest rate cuts to pricing in at least one 25 basis point rate increase before year-end. New Federal Reserve Chair Kevin Warsh reinforced this shift, emphasizing the central bank’s commitment to returning inflation to target. Consequently, five-year Treasury yields rose above 4.20%, while twenty-year Treasury yields approached 5%.
Progress toward a peace agreement and the reopening of key shipping routes have given policymakers additional time to assess the inflation outlook, reducing the immediate need for a more aggressive policy response. Even so, the environment remains challenging, with bond markets continuing to test the Federal Reserve’s willingness to tighten policy further should inflation remain persistent.
Looking ahead, we continue to see attractive opportunities across the major asset classes. Within equities, we expect market leadership to broaden beyond the AI infrastructure companies that have dominated returns over the past several years. While beneficiaries of capital spending should continue to perform well, a growing number of AI adopters are beginning to distinguish themselves by using advanced computing to improve productivity, expand margins, and gain market share. Several leading financial institutions, for example, are already demonstrating measurable operating improvements through the deployment of artificial intelligence.
Healthcare also appears well positioned as we move into the second half of the year. Historically, the sector has been one of the market’s strongest performers during the July to December period of U.S. midterm election years, benefiting from its defensive characteristics, stable earnings, and durable cash flows. Beyond this historical tendency, powerful secular drivers, including an aging global population, increasing healthcare utilization, and continued innovation in pharmaceuticals, biotechnology, and medical technology, continue to support the sector’s long-term investment outlook.
While we expect leadership within technology to broaden, we do not believe the artificial intelligence investment cycle is nearing an abrupt end. Barring an unforeseen geopolitical shock, the sector appears to have additional room to appreciate. Since the introduction of ChatGPT, the Philadelphia Semiconductor Index (SOX) has risen approximately 415%, compared with an 884% advance during the 1994 to 2000 internet buildout, while the NASDAQ has gained roughly 146% versus 546% during the dot-com era. More importantly, the current cycle has been supported by robust earnings growth rather than valuation expansion alone. The tech-heavy NASDAQ’s forward price-to-earnings ratio has remained around 25x, compared with an expansion from roughly 15x to more than 60x during the technology bubble.
Likewise, Nvidia Corporation, arguably the AI vanguard, currently trades at approximately the broader market multiple on one-year forward earnings, a sharp contrast to Cisco Systems, which traded at well over 100x earnings at the peak of the internet boom. While valuations warrant continued discipline, today’s AI-driven market appears to rest on a much stronger fundamental foundation than the speculative excesses of the late 1990s.
The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.
