What Worked and What Didn't

Global equities staged a robust recovery in the second quarter, as accelerating artificial intelligence (AI) capital expenditures (capex) fueled Information Technology sector leadership. Crude oil prices moderated following an agreement between the U.S. and Iran that allowed the Strait of Hormuz to partially reopen. Bond yields finished modestly higher after peaking in May, while credit spreads returned to relatively tight levels.

Index Performance

	3-mo	Jun	May	Apr
U.S. Equity
Russell 3000®	15.4	(0.3)	5.1	10.2
S&P 500®	15.2	(1.0)	5.3	10.5
S&P 500 Growth®	21.9	(1.8)	8.1	14.8
S&P 500 Value®	8.0	0.0	2.0	5.9
S&P MidCap 400®	14.5	3.6	2.5	7.9
Russell 2000®	21.5	3.7	4.4	12.2
International Equity
MSCI ACWI Ex USA IMI	13.8	(1.0)	4.9	9.7
MSCI World Ex USA IMI	9.9	(0.8)	3.0	7.5
MSCI EM IMI	22.7	(1.6)	8.9	14.5
Fixed Income
Bloomberg U.S. Aggregate Bond	0.7	0.2	0.3	0.1
Bloomberg U.S. Corporate High Yield	2.5	0.3	0.5	1.7
Bloomberg EM USD Aggregate	3.4	0.6	0.7	2.1
Bloomberg Municipal	2.5	1.0	0.4	1.1
Bloomberg U.S. Treasury Bill 1-3mo	0.9	0.3	0.3	0.3

As of 6/30/2026. Source: Morningstar Inc.

Which Asset Classes Led in Q2?

Emerging Market Equity (22.7%)

Our thesis: Emerging markets (EM) contribute more than half of global GDP but only represent a modest weighting in the MSCI All Country World Index. Long-term secular and economic growth themes support our positive view of the asset class.

Quarter recap: Continued demand from the AI buildout helped boost large technology companies, particularly for semiconductor stocks in South Korea and Taiwan.

Looking ahead: We remain favorable on EM given the strong earnings outlook, technology innovation in Asia and fading global trade policy concerns, but high concentration in semiconductor stocks is a source of volatility.

U.S. Small-cap Equity (21.5%)

Our thesis: Elevated interest rates can be challenging for U.S. small-capitalization (cap) equities, but we believe they should likely benefit from U.S.-centric revenue exposure over the long term.

Quarter recap: Small-cap equities gained for a fifth consecutive quarter, supported by Information Technology sector returns and broad earnings growth.

Looking ahead: Near-term inflation and elevated borrowing costs could be headwinds, but small-cap equities could benefit from positive earnings trends and disproportionately from AI due to their greater labor intensity, in our view.

U.S. Large-cap Equity (15.2%)

Our thesis: U.S. large-cap equities are the long-term growth and innovation engine of public equities, given their sustainable, high-quality fundamental characteristics.

Quarter recap: U.S. large-cap equities logged their best quarterly performance since 2020 as AI capex and semiconductor demand drove mega-cap technology stocks higher following the de-escalation of geopolitical tensions in the Middle East.

Looking ahead: We believe U.S. large-cap equities should continue to exhibit strong earnings growth and profit margins, given their robust technology sector exposure.

Which Asset Classes Lagged in Q2?

Emerging Market Debt (3.4%)

Our thesis: EM debt offers better fundamentals and higher income generation relative to developed international markets, in our view. Most of the index is composed of sovereign debt, which reduces credit risk relative to corporate credit.

Quarter recap: EM debt performance rebounded on an improving inflation outlook and expectations of less restrictive fiscal policy.

Looking ahead: Despite geopolitical risks, EM debt still offers an attractive yield pickup over developed markets, and exposure to sovereign debt linked to higher economic growth potential.

U.S. High Yield (2.5%)

Our thesis: Over the course of a full business cycle, we expect high yield to outperform core fixed income. The asset class has historically been more correlated to equity markets than to the direction of interest rates, so it carries considerable risk relative to core fixed income.

Quarter recap: Credit spreads were elevated to begin the quarter but ended relatively tight due to Iran conflict de-escalation. Solid returns for risk assets contributed to the quarter’s positive return.

Looking ahead: Valuations are rich as high yield credit spreads sit near cycle lows. Coupon-clipping amid a stable economic backdrop is our base case expectation.

Core Fixed Income (0.7%)

Our thesis: Core fixed income tends to be the primary ballast in multi-asset portfolios given its broad diversification across investment-grade U.S. Treasury, corporate and securitized markets.

Quarter recap: Core bonds finished approximately flat despite intra-quarter yield volatility, with slightly higher yields reflecting concerns about the passthrough of high energy prices to inflation.

Looking ahead: Over the long term, core fixed income can provide stability and income in portfolios, as well as help dampen volatility. In our view, current yields offer reasonable compensation despite increased near-term inflation expectations.

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