Global equity markets have experienced a strong first half of the year, posting their best quarterly performance since 2020, but signs of increased volatility are emerging as investors weigh rising risks. The MSCI All Country World Index advanced roughly 13 percent in the past three months, reflecting a robust rebound across major markets. Key Asian indices led gains, with South Korea’s KOSPI surging approximately 63 percent and Japan’s Nikkei 225 rising about 36 percent. Meanwhile, the Nasdaq 100 gained 24 percent, and the Philadelphia Semiconductor Index soared 84 percent during the quarter.

However, this momentum faltered sharply last Friday after reports emerged that OpenAI, the owner of ChatGPT, might delay its planned initial public offering. The news triggered an 8.2 percent drop in the KOSPI and a 4.4 percent decline in the Nikkei 225, with shares of SoftBank falling 14 percent. By contrast, Australia’s market, which is less exposed to technology stocks, recorded a more modest 3 percent gain this quarter.

Market strategists remain generally optimistic about equities but are adopting a more cautious stance. Barclays global research chairman Ajay Rajadhyaksha noted that much of the positive outlook is already reflected in current prices, making it harder to find undervalued opportunities. While still favoring equities over bonds, his conviction has diminished compared to three months ago.

Corporate earnings have been a key driver of market performance, particularly in the United States. The S&P 500’s earnings grew by 19 percent year-on-year, with technology giants posting a 30 percent increase. Notably, other segments of the tech sector recorded earnings growth of about 50 percent, broadening leadership beyond the largest companies. Morgan Stanley analyst Mike Wilson anticipates S&P 500 earnings growth accelerating to 23 percent in 2026, driven in part by a surge in artificial intelligence (AI) capital expenditures. AI infrastructure spending is projected to exceed $700 billion in 2026 and approach $1 trillion by 2027.

JPMorgan chief economist Bruce Kasman predicts this AI-driven expansion will extend beyond leading technology firms, boosting demand for materials, energy, construction, and labor globally. However, Bank of America strategist Claudio Irigoyen cautions that while AI is a key engine for growth, it also risks deepening economic disparities, potentially destabilizing markets if asset prices fall sharply.

Underlying inflation and interest rates remain major concerns. Core inflation rates persist above central bank targets in most developed economies. Market expectations have shifted from anticipating U.S. Federal Reserve rate cuts by year’s end to projecting at least one increase, with Bank of America forecasting three hikes totaling 75 basis points starting in September. Although recent developments, including a ceasefire between the U.S. and Iran and falling oil prices, have eased some geopolitical uncertainty, Barclays expects the U.S. 10-year Treasury yield to rise to 4.65 percent within a year as government and corporate borrowing climbs to $29 trillion globally.

Economic conditions vary regionally. The United States, propelled by strong earnings, AI investment, and a resilient labor market, remains a global growth leader, supported by East Asian exporters integrated into the technology supply chain. Conversely, Europe’s economy contracted in the first quarter and faces additional European Central Bank rate hikes, while China grapples with sluggish retail sales, a struggling property sector, and ongoing deflation despite official growth targets.

In Australia, growth is constrained by multiple headwinds, including an energy shock, a hawkish Reserve Bank policy, and weakening private demand. Bank of America projects the cash rate will remain at 4.35 percent through 2026, with a gradual easing phase beginning in August 2027. Inflation is expected to peak at 4.7 percent in the June quarter. Citi economists predict the Reserve Bank may maintain a hawkish stance, with a potential rate increase in August. Australia also faces the risk of experiencing its third El Niño weather event in a decade from late 2026, which could negatively impact agricultural output.

Looking ahead, market watchers advise that while economic fundamentals remain solid, opportunities for bargain investments are diminishing as valuations rise and uncertainties mount. Investors are urged to navigate a landscape where the positive momentum of recent quarters may give way to increased volatility and sector divergence.