Second-quarter markets delivered a powerful rebound, with participation extending beyond U.S. large-cap technology. The rally reflects a resilient U.S. economy and powerful AI-related investment cycle, but stronger growth also keeps inflation and policy risks hard to dismiss. For investors, while the rebound has broadened, the period ahead will likely require more selectivity, discipline, and focus on structural growth.
Asset class performance
Total return, annual averages over period shown, 2011-June 2026
Source: Clearnomics, Principal Asset Management. Asset classes are represented by the S&P 500, MSCI EM, MSCI EAFE, Russell 2000, iShares Core U.S. Bond Aggregate and Bloomberg Commodity Index. The Balanced Portfolio is a hypothetical 60/40 portfolio consisting of 40% U.S. Large Cap, 5% Small Cap, 10% International Developed Equities, 5% Emerging Market Equities, 35% U.S. Bonds, and 5% Commodities. Data as of June 30, 2026.
The global economy continues to demonstrate remarkable resilience, but the drivers of growth are evolving. What began as a technology story has become one of the largest infrastructure buildouts in modern history, with AI-related investment, data center construction, and broader infrastructure spending helping to offset cyclical softness and buffer the economy against downside risks. As a result, the AI capex cycle has emerged as a dominant force shaping economic growth, corporate earnings, and market returns.
Global markets delivered strong gains in the second quarter, with leadership broadening beyond U.S. large-cap technology. Emerging market equities, small caps, and other risk assets participated in the rally as geopolitical tensions eased, and economic data continued to surprise to the upside. Notably, opportunities are increasingly emerging across the broader AI ecosystem, where adoption, infrastructure investment, and productivity gains are creating new sources of growth.
Still, the investment backdrop is becoming more complex. While our base case is now that central banks keep policy broadly steady, the risk is that sustained growth, sticky core inflation, or less-anchored inflation expectations force them to tighten again, leaving the policy outlook finely balanced.
In the second half of 2026, investors should continue to favor areas of the market benefiting from structural growth trends, while maintaining discipline in markets where elevated valuations and tight fixed income spreads leave little room for error.
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