Global stocks surge 13% in Q2, best quarter in six years

Global stocks surged 13% in the second quarter, their best three-month gain since 2020, as a resilient U.S. economy and artificial intelligence optimism powered equities higher.

"Earnings are on a tear," analysts at Capital Group wrote, noting that S&P 500 profits increased 28% year-over-year in the first quarter, the fastest pace since 2021.

The S&P 500 rose 1.2% on Monday to close at a record, while the Dow Jones Industrial Average finished above 52,000 for the first time. The Nasdaq Composite gained 2.1%, snapping a five-session losing streak. All 11 major S&P 500 sectors finished higher, with technology and consumer discretionary shares leading the advance. Tesla rose 8.5%, and Alphabet gained nearly 5% in its first day as a Dow component.

The question for the second half is whether valuations can justify further gains. Valuation metrics have climbed to levels that some strategists consider stretched, even as earnings growth has been strong. The Federal Reserve's hawkish tilt under new Chair Kevin Warsh adds another layer of uncertainty, with at least half of policymakers anticipating a rate increase this year.

Earnings Growth Outpaces Expectations

The S&P 500's first-quarter earnings growth of 28% year-over-year exceeded Wall Street's start-of-year estimates by a wider margin than any year outside of a recession rebound in data going back to 1991, according to Wells Fargo. Fidelity analysts described the growth rates as "typically seen in the early stages of an economic recovery, not four years into a record-setting bull market."

Valuations Flash Caution Signs

Despite the earnings strength, the S&P 500 has risen more than 7% year-to-date, outpacing the pace of earnings revisions. The cross-asset picture adds to the caution. The U.S. dollar index gained 1.4% in the second quarter, putting pressure on commodities and emerging-market currencies. Gold posted its steepest quarterly drop in over a decade, falling roughly 14%, while the Japanese yen weakened past 162 per dollar, a four-decade low. The 10-year U.S. Treasury yield held above 4.37%, reflecting expectations that the Fed will keep rates elevated.

For portfolio managers, the divergence between equities and other asset classes creates a complex backdrop heading into the third quarter. The S&P 500's rally has been driven by a narrow set of mega-cap technology stocks, raising questions about market breadth. The next major test comes Thursday with the release of the personal consumption expenditures price index, which will shape expectations for the Fed's July meeting.

This article is for informational purposes only and does not constitute investment advice.