It was the best quarter for global shares in six years - a headline calm enough to reassure anyone. Yet beneath the surface, was a narrow, restless market, carried by a handful of companies and themes and prone to violent swings. A strong quarter, but a time to keep clear eyes rather than get swept up in it.
A record quarter, supported by subsiding fears
Global shares, measured by the MSCI All Country World Index, rose almost 15% over the quarter, their strongest three months since 2020. The catalyst was an easing in geopolitical tension. The quarter opened with a shaky US-Iran ceasefire and, after several flareups along the way, closed with a firmer memorandum of understanding between them. As the threat to global oil supply receded, the wartime premium drained out of energy prices. Brent crude fell almost 40% in the quarter, its sharpest decline since the pandemic and a welcome relief for the inflation outlook. Investors who had spent the previous quarter braced for the worst were able to exhale.
Serene on the surface, turbulence beneath
Yet the calm of the headline market gain is a little misleading. Beneath the surface the market was more like the proverbial duck – calm above the water, paddling furiously beneath. The gap between the best and worst performing US shares was the widest on record, around one and a half times that of any previous quarter. Much of that reflected by a small band of AI winners, largely semiconductor stocks, racing ahead while the rest of the market was left behind. Breadth was thin to match, only around a third of US shares beat the market over the quarter. A market that looked calm and broad from a distance was, up close, narrow and prone to violent swings.
South Korea illustrates the dynamic at play in most markets
Nowhere was this clearer than in South Korea, where two memory chip makers SK Hynix and Samsung account for 40% of the domestic share market index. South Korea was the best-performing major share market in the world during Q2, up almost 70% as these memory chip makers at the heart of the AI build out soared (with SK Hynix and Samsung up 228% and 100% respectively).
Yet these record returns came with record volatility. The Korean market moved by more than five percent on thirteen separate days in the quarter, and by more than eight percent on five of them, a churn amplified by a mania for leveraged funds that magnify every move. While the headline quarterly gain gave holders of Korean stocks something to cheer about, this came with some of the most violent trading on record.
A melt-up supported by near-term earnings
There is, though, one genuinely reassuring feature beneath all this. As we wrote last month, this has been a melt-up built on earnings growth rather than hope alone. Across global markets the gains have come from rising company profits, not from investors simply paying ever more for each dollar of them.
One note of realism, though. Those are forecast earnings, revised up at a remarkable pace, and the market's confidence rests on that growth arriving – and being sustainable. Companies like SK Hynix and other semiconductor stocks that now account for c.15-20% of many mainstream equity markets have a lot to prove, and the least room to disappoint.
The Fed turns
The other shift during the quarter worth noting came from the US Federal Reserve. The more dovish leadership markets had expected did not materialise. Under new chair Kevin Warsh, the Fed struck a hawkish note at its first meeting, even pencilling in a possible rate rise for later this year. By quarter-end, though, with oil falling, rhetoric had softened a little, and Warsh was signalling that the immediate inflation scare may be fading.
Even so, inflation has climbed to a three-year high and become more of a problem than it was before the Iran war, and that will take time to work back out of the system. The shift was not confined to America, either. Closer to home, the Reserve Bank of Australia and the RBNZ are facing the same setup. Investors have travelled a long way in six months, a market that began the year expecting rate cuts is now pricing rate rises before the year is out.
What it means for investors
So, the best quarterly performance in six years deserves an asterisk. It was a strong quarter, but one driven by a few dominant themes and punctuated by violent swings beneath the surface. The gains were real and, encouragingly, built on profits rather than pure speculation. But they were also narrow, and their sustainability reliant on those companies living up to some very high expectations. Set against a rate backdrop that has turned less friendly, the case for discipline over enthusiasm is a strong one.
This means being selective, owning good businesses at sensible prices rather than chasing whatever has climbed the fastest, and keeping portfolios positioned for the years ahead rather than the quarter just gone. What matters most is that your investments suit your own time horizon and your tolerance for the ups and downs that come with them.
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