The war-driven selloff last quarter was brief, with global equity markets roaring back in April and then going on to deliver strong second quarter results. The MSCI World ex USA Index gained 10.2% for the quarter, outpacing the still-respectable 7.9% return of the MSCI World ex USA Small Cap Index. During June, both indices declined, but they still finished the first half of the year with gains of nearly 11%. This performance came despite a continued, albeit modest, 2.9% appreciation in the US dollar during the first half.
While the bull market remains intact, underlying market breadth and participation suggest a more nuanced backdrop. The AI trade has become the dominate driver of global market direction while price moves across the largest names in the space are showing dramatic levels of daily volatility. As a case in point, the largest name in the MSCI World Small Cap Index is now Sandisk, a memory company benefiting from the voracious demand for its chips. The stock ended the quarter with a market cap of about US$300 billion (that’s a heck of a small cap!) and while it has increased greater than 200% since the end of last quarter the daily volatility is closer to that of a micro-cap meme stock. During the quarter Sandisk was +/- 3%, on 43 out of 62 trading days (69% of the time). Within small caps most of the AI beneficiaries are suppliers to big AI companies and benefit from the capex spend of large hyperscalers and their direct equipment suppliers. This is real; the orders are real, the spending is real, and the profits are real. However, capex spend is not the same as end demand. When the build out ends the demand decline for capex will be significant, even in a world where AI is as successful as the bulls hope. It is difficult to know how long this AI capital investment cycle will last. However, recognizing that it is cyclical is key to positioning for broader, more normalized market performance and avoiding the classic downturn that we believe will inevitably arrive.
Our approach has been to let some of our AI ‘winners’ continue their dramatic runs; periodically taking some profits off the table but acknowledging that the cycle may have many quarters of outperformance ahead. We are taking the gains and recycling them into what we consider out-of-favor but stable businesses, with attractive valuations but lacking the narrative excitement the market continues to pay up for.
In terms of the Middle East conflict, the ceasefire has created a Schrödinger’s Strait situation where the Strait of Hormuz is either open or closed or both depending upon the day. However, by the end of the quarter the shipping lanes began to open. This, combined with a dramatic increase in US exports and high reserves in China helped stave off the worst fears from March and April. A resumption in the petroleum product flow out of the Gulf is a significant positive for Asia and Europe. Unfortunately, the current situation looks to be a classic case of an unstable Nash equilibrium where neither side has much to gain from resuming conflict, but events could easily upset the fragile peace.
Global markets are not cheap, and some major markets are arguably expensive. We are fond of saying that ‘initial conditions matter’ and the current conditions have not historically presaged high future returns at the index level. However, this highlights one of the most attractive qualities of investing in small cap markets: the ability to own niche companies where success is not dependent on crowded macro themes or index level valuations. Those able to own a portfolio different than the index can currently find compelling investment ideas around the world, with idiosyncratic business drivers and their own investment narratives.
Some of the political and macroeconomic concerns are providing us with these opportunities. For example, the Japanese yen is back to levels not seen since before the Plaza Accord in the 1980s. Meanwhile, the UK is about to welcome their seventh Prime Minister in the last 10 years. But these macro concerns just provide us the opportunity to buy, what we believe, are amazing businesses at a discount; supported by a weak yen in Japan and cheap multiples in the UK. For investors with the ability to use short-term volatility and focus on long-term business dynamics the outlook is quite attractive.
This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.
Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.
Keep
Reading
Global Equity Market Commentary – 1Q 2026
Global Equity | Insight
Global equities reversed in March amid Iran-related conflict. We assess energy risks, inflation implications, and where quality can win.
Global equities rose in 2025, with non‑US markets outperforming as shifts in trade, currency, and valuations created compelling international opportunities.
We use cookies to improve your experience on our website. To accept cookies click Accept & Close, or continue browsing as normal. For more information or to learn how to opt out of cookies, please see our cookie policy.
Global Equity Market Commentary – 2Q 2026
The war-driven selloff last quarter was brief, with global equity markets roaring back in April and then going on to deliver strong second quarter results. The MSCI World ex USA Index gained 10.2% for the quarter, outpacing the still-respectable 7.9% return of the MSCI World ex USA Small Cap Index. During June, both indices declined, but they still finished the first half of the year with gains of nearly 11%. This performance came despite a continued, albeit modest, 2.9% appreciation in the US dollar during the first half.
While the bull market remains intact, underlying market breadth and participation suggest a more nuanced backdrop. The AI trade has become the dominate driver of global market direction while price moves across the largest names in the space are showing dramatic levels of daily volatility. As a case in point, the largest name in the MSCI World Small Cap Index is now Sandisk, a memory company benefiting from the voracious demand for its chips. The stock ended the quarter with a market cap of about US$300 billion (that’s a heck of a small cap!) and while it has increased greater than 200% since the end of last quarter the daily volatility is closer to that of a micro-cap meme stock. During the quarter Sandisk was +/- 3%, on 43 out of 62 trading days (69% of the time). Within small caps most of the AI beneficiaries are suppliers to big AI companies and benefit from the capex spend of large hyperscalers and their direct equipment suppliers. This is real; the orders are real, the spending is real, and the profits are real. However, capex spend is not the same as end demand. When the build out ends the demand decline for capex will be significant, even in a world where AI is as successful as the bulls hope. It is difficult to know how long this AI capital investment cycle will last. However, recognizing that it is cyclical is key to positioning for broader, more normalized market performance and avoiding the classic downturn that we believe will inevitably arrive.
Our approach has been to let some of our AI ‘winners’ continue their dramatic runs; periodically taking some profits off the table but acknowledging that the cycle may have many quarters of outperformance ahead. We are taking the gains and recycling them into what we consider out-of-favor but stable businesses, with attractive valuations but lacking the narrative excitement the market continues to pay up for.
In terms of the Middle East conflict, the ceasefire has created a Schrödinger’s Strait situation where the Strait of Hormuz is either open or closed or both depending upon the day. However, by the end of the quarter the shipping lanes began to open. This, combined with a dramatic increase in US exports and high reserves in China helped stave off the worst fears from March and April. A resumption in the petroleum product flow out of the Gulf is a significant positive for Asia and Europe. Unfortunately, the current situation looks to be a classic case of an unstable Nash equilibrium where neither side has much to gain from resuming conflict, but events could easily upset the fragile peace.
Global markets are not cheap, and some major markets are arguably expensive. We are fond of saying that ‘initial conditions matter’ and the current conditions have not historically presaged high future returns at the index level. However, this highlights one of the most attractive qualities of investing in small cap markets: the ability to own niche companies where success is not dependent on crowded macro themes or index level valuations. Those able to own a portfolio different than the index can currently find compelling investment ideas around the world, with idiosyncratic business drivers and their own investment narratives.
Some of the political and macroeconomic concerns are providing us with these opportunities. For example, the Japanese yen is back to levels not seen since before the Plaza Accord in the 1980s. Meanwhile, the UK is about to welcome their seventh Prime Minister in the last 10 years. But these macro concerns just provide us the opportunity to buy, what we believe, are amazing businesses at a discount; supported by a weak yen in Japan and cheap multiples in the UK. For investors with the ability to use short-term volatility and focus on long-term business dynamics the outlook is quite attractive.
Disclosures
This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.
Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.