Global financial markets saw a pronounced recovery in the second quarter of 2026, supported by easing inflation concerns and the continued boom in artificial intelligence. After the geopolitical headwinds at the start of the year, optimism returned to equity markets from April onwards, driving strong gains across nearly all regions.

Equity markets staged a broad-based rally, underpinned above all by a strong first-quarter earnings season in the US. Most S&P 500 companies reported results ahead of analysts’ expectations. US equity markets delivered strong gains overall, with the technology-heavy Nasdaq benefiting in particular from the sustained momentum behind AI-related companies. Continental European equities also moved higher, underpinned by resilient economic data. However, the DAX saw increased volatility over the course of the quarter, with some pronounced moves in individual stocks. British shares lagged somewhat behind, held back by weaker commodity prices. Emerging markets were a particular bright spot, with equities delivering a notable, though often overlooked, outperformance over the year to date.

The environment for bond markets also became more supportive. Bond markets were supported by declining inflation expectations and the prospect of a less restrictive monetary policy stance over the medium term. Corporate bond spreads continued to tighten, with Euro and US high-yield bonds, as well as emerging market debt, delivering a solid quarterly performance. On the central bank front, the Bank of Japan continued to normalise monetary policy, raising its policy rate as expected and driving Japanese government bond yields higher.

A marked easing of geopolitical tensions in the Middle East also contributed to the stabilisation of markets. Signals pointing to the reopening of strategically important trade routes, particularly the Strait of Hormuz, helped bolster investor confidence. As a result, oil prices declined sharply towards the end of the quarter, further reducing global inflationary pressures and giving central banks greater monetary policy flexibility.

Looking ahead to the second half of the year, the focus is likely to shift back more clearly towards the underlying economic fundamentals. Investors will increasingly be looking for evidence that the substantial investment in artificial intelligence is translating into measurable productivity gains and stronger corporate margins. At the same time, the upcoming US midterm elections in November and the possibility of further trade and tariff measures later in the year are likely to keep volatility elevated.

Against this broadly favourable market backdrop, our convertible bond fund LiLuxConvert also performed well, delivering a positive return of 2.54% in the second quarter.