Global growth remains strong and is supporting resilient markets.
Market leadership is broadening as AI-related technology loses momentum.
With a lack of clear sectoral market leadership, we believe it’s a classic stockpickers’ market.
Markets have been remarkably resilient, underpinned by strong and accelerating economic growth. At the same time, elevated volatility and shifts in market leadership suggest that no single sector or industry is likely to dominate as we move further into the second half of 2026. In this environment, we believe stock selection should become increasingly important, with accelerating earnings growth as the key to identifying potential winners. In other words, we believe it’s a classic stockpickers’ market.
Broad Market Strength: Masking a Shift
Equities posted strong gains across regions in the second quarter. U.S. all-cap equities[1] returned 15.7%, while emerging markets (EM) equities[2] gained 22.8%, and developed markets outside the United States[3] rose 14.0%. Global small-cap equities also advanced, returning 15.1%.[4]
Positive equity returns have largely carried into the third quarter. Quarter-to-date as of August 19, U.S. all-cap equities have gained 2.6%, non-U.S. developed-market equities are up 2.0%, and U.S. value equities[5] have risen 5.8%. The notable exception has been EMs, down 2.5% quarter to date, as the rotation in South Korean and Taiwanese companies tied to the AI technology and infrastructure buildout had an outsized effect on EM performance.
Industries that lagged in 2025 and the first half of 2026 have moved to the top of the leaderboard quarter to date.
Equity markets have remained resilient at the index level but are experiencing substantial churn beneath the surface. Globally, industries that lagged in 2025 and into the first half of 2026—such as leisure products, software, and healthcare (the latter including technology, life science tools, and biotech) have moved to the top of the leaderboard quarter to date.[6] Market leadership has not rotated into a defensive posture, but rather into industries that have typically performed well when economic activity has been healthy and expanding, consistent with the current growth backdrop.
Another way to see the rotation is through weekly S&P 500 Index returns. At the index level, the market was relatively flat from May through the end of July, despite considerable week-to-week volatility. Looking at the sectoral return drivers, broadly defined technology stocks drove the majority of the aggregate returns in April and May. Into June and July, technology detracted materially from S&P 500 Index performance, even as other sectors helped offset the decline. For active managers that were overweight AI-related technology and infrastructure beneficiaries, the reversal created a meaningful headwind—even though the broader index itself appeared relatively stable.
AI Hardware Selloff
Sources: FactSet and WB Analysis, as of 8/19/2026. Past performance is not indicative of future returns. A direct investment in an unmanaged index is not possible.
Growth: Supporting Market Resilience
What is underpinning the resilience in financial markets? Growth around the world remains strong.
Across broad measures of macroeconomic indicators on the supply and demand sides—including manufacturing purchasing managers’ index, auto sales, and inflation-adjusted retail sales—the latest data have generally improved compared to previous months.
Economic surprise indicators provide another lens on the strength of the global backdrop. Rather than measuring whether economic activity is strong or weak in absolute terms, they show whether incoming data are exceeding or falling short of market expectations. Developed-market economies are generally surprising to the upside: U.S. data continue to come in ahead of expectations, the euro area has rebounded sharply from its second-quarter trough, while Japan is delivering unusually strong upside surprises.
The EM picture is more mixed. Chinese data continue to disappoint relative to expectations, and Latin America has also been weaker than anticipated. EM Asia has lost some momentum as well, consistent with the broader cooling in AI-related technology and infrastructure activity.
Economic Surprises
Source: Citi, as of 8/17/2026.
Economic activity is still relatively buoyant, and much of the developed world is performing better than markets had expected. The change in leadership appears less about investors preparing for an economic downturn and more about capital rotating within a still-expanding global economy.
Inflation Volatility: The Next Challenge
Strong growth is supporting markets, but inflation is likely to remain volatile. Three forces, in particular, could keep price pressures unsettled through the second half of the year: energy prices, semiconductor prices, and tariffs.
Energy is the first source of uncertainty. Crude oil prices have been volatile, but the prices of refined products that businesses and consumers actually use—including gasoline and diesel—have risen more sharply. That matters as the Northern Hemisphere moves toward the period when inventories are typically rebuilt ahead of winter. Rapid price swings make it more difficult for companies to plan, procure inputs, and hedge exposures, particularly when commodities are priced in currencies different from those in which companies generate revenue. That uncertainty can weigh on demand even if outright energy prices ultimately moderate.
“Chipflation” could keep price pressures unsettled.
The second source is “chipflation.” Memory semiconductor prices have risen dramatically amid supply constraints. As chips are now ubiquitous in consumer-facing goods, from automobiles to coffee pots, higher prices along the semiconductor supply chain add upward pressure to goods inflation. However, there are signs that the pricing pressure, specifically in memory chips exported from South Korea, may be beginning to ease, which may also explain some of the recent rotation away from AI-related technology and infrastructure beneficiaries.
Tariffs represent the third source of uncertainty. After the Supreme Court invalidated the U.S. administration’s broad tariffs imposed under emergency-powers authority earlier this year, the administration has continued to pursue additional trade actions through various mechanisms, including Section 301. There is scope for further changes in tariff treatment, along with additional headline and policy uncertainty.
Together, these forces could keep inflation volatile even as economic growth remains healthy. That matters because inflation volatility can erode purchasing power and make planning more difficult for both households and businesses. In the United States and Europe, that pressure is increasingly visible in slowing real wage growth, creating a potential headwind for consumer demand as the year progresses.
Year-Over-Year Change in Hourly Wages (Inflation)
Sources: Eurostat (for Euro area data) and BLS/BEA (for U.S. data).
Rising Rates: Not Necessarily Bad News
Rising government bond yields across developed markets have raised concerns about fixed-income performance and debt sustainability, but the rise in yields also reflects something more constructive: stronger demand for capital.
As investment in physical infrastructure, manufacturing capacity, energy, defense, and other tangible assets increases (as we discuss in “Revenge of the Tangibles”), so does capital spending. More capital spending means greater demand for financing, which in turn can put upward pressure on the cost of capital. That dynamic is evident across the yield curve, with bond yields all moving higher across all tenors in the United States, Japan, and Germany.
Yet higher rates do not necessarily imply worsening debt dynamics. What matters is the relationship between borrowing costs and nominal economic growth. If nominal gross domestic product (GDP) is growing faster than nominal interest rates, debt ratios can still improve even as yields rise. This scenario is playing out in Japan today: government debt to GDP peaked in 2022 and subsequently has fallen by 10%, while 10-year yields rose by nearly 200 basis points from 2022 through 2025.
Japan Debt-to-GDP and Yields
Sources: Bloomberg, BoJ, and Japanese Cabinet Office. 2026 government debt numbers are estimates. Government yields are as of 8/20/2026.
The Story in Short
Markets have remained resilient in 2026, supported by strong and, in many cases, accelerating global growth. But beneath the surface, leadership is shifting: AI-related technology and infrastructure have lost momentum, a broader range of industries and countries are participating, and higher capital spending is helping push interest rates higher.
At the same time, inflation remains a source of uncertainty, with volatile energy prices, elevated semiconductor costs, and tariffs all contributing to a less predictable backdrop.
The result is an environment in which economic fundamentals remain supportive, but greater dispersion, higher capital costs, and less consistent market leadership could make security selection increasingly important in the second half of the year.
Olga Bitel, partner, is the chief investment strategist at William Blair.
Alexa Davis is a strategy analyst on William Blair’s global equity team.
[1]U.S. all-cap equities are represented by the MSCI USA IMI. [2]EM equities are represented by the MSCI EM IMI. [3]Developed markets outside the United States are represented by the MSCI ACWI ex-USA IMI Index. [4]Global small-cap equities are represented by the MSCI ACWI Small Cap Index. [5]U.S. value equities are represented by the MSCI USA IMI Value Index. [6] Source: MSCI ACWI grouped by GICS industry.
The MSCI (All Country World Index) ACWI is a free-float-adjusted market-capitalization-weighted index designed to measure equity market performance across developed and emerging markets worldwide. The MSCI ACWI ex-USA IMI Index captures large-, mid-, and small-cap representation across developed markets excluding the United States and EMs, covering approximately 99% of the global equity opportunity set outside the United States. The MSCI ACWI Small Cap Index captures small-cap representation across developed and EMs and covers approximately 14% of the free float-adjusted market capitalization in each country. The MSCI EMs IMI Index captures large-, mid-, and small-cap representation across EMs and covers approximately 99% of the free float-adjusted market capitalization in each country. The MSCI USA IMI Index measures the performance of the large-, mid-, and small-cap segments of the U.S. equity market, covering approximately 99% of U.S. free float-adjusted market capitalization. The MSCI USA IMI Value Index captures large-, mid-, and small-cap U.S. securities exhibiting value characteristics. The S&P 500 Index measures the performance of 500 leading U.S. companies and covers approximately 80% of available U.S. market capitalization.
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