Market commentary equities: Between risk appetite, technology leadership and factor rotation

The second quarter of 2026 was characterised by a pronounced recovery in international equity markets following a volatile start to the year. This was not a defensive stabilisation, but rather an environment of increased risk appetite. The strongest momentum was seen in emerging markets, which gained 25% in euro terms. The MSCI World also posted a strong return of 14.6%, while Europe closed the quarter with a robust, though somewhat more moderate, gain of 11.8%.

The timing of the move is notable. A significant share of performance was already achieved in the first half of the quarter, through mid-May. The upward trend then continued, but with less momentum. This suggests that market participants carried out a substantial repricing early in the quarter, while the second half was more characterised by consolidation at higher levels.

Market Structure: Technology and cyclical breadth

At sector level, market leadership was clearly technology driven. Semiconductors performed particularly strongly at +55.9%, as did technology hardware at +29.8%. The scale of these moves shows that the AI and infrastructure cycle remains a central driver of returns. However, the development should be understood less as a broad-based technology rally and more as a concentration in those segments that benefit directly from the build-out of digital infrastructure, computing capacity and AI-related capital expenditure.

At the same time, the market move was not limited to technology alone. Banks also delivered significant outperformance, with a gain of +18.5%. Capital goods, media, cyclical consumer segments and selected consumer services also developed positively. This pattern points to an environment in which cyclical and growth-oriented market segments were supported at the same time.

By contrast, energy, telecommunication services and parts of the real estate sector performed weaker. Energy lost 12.7%, while the real estate sector declined by 7%. The relative weakness of defensive or interest-rate-sensitive areas fits the overall picture: in the second quarter, the market rewarded stability and income less than growth, operating leverage and cyclical recovery.

Factor rotation: Momentum and value rather than defensiveness

The style indices confirm this interpretation. Within the MSCI World index, momentum, with a relative return of +20.6%, and enhanced value, with +16.3%, were clearly ahead. Growth also generated a positive relative return of +5.2% but remained well behind momentum and value. This is noteworthy because it signals not only a continuation of the growth trend, but also a broader rotation within return drivers.

In emerging markets, the picture was even more pronounced. Momentum delivered a relative return of +41% versus the MSCI Emerging Markets, while enhanced value returned +23%. Growth was only slightly positive, while small cap, quality and minimum volatility lagged. This combination points to a market environment in which investors were not primarily seeking quality or stability but were responding strongly to existing price trends and valuation-related catch-up potential.

Europe showed a more differentiated picture. Growth was slightly ahead relative to the MSCI Europe, while minimum volatility, small cap and dividend multi-factor strategies lagged. The European market structure was therefore less clearly shaped by momentum and value than the global market or emerging markets. Nevertheless, it is also evident here that defensive factor profiles had no tailwind during the quarter.

For quantitative equity strategies, this constellation is important. It shows a high degree of dispersion between factors, regions and sectors. Such phases can, in principle, be attractive for multi-factor approaches if models are not one-sidedly aligned with a single style. At the same time, they require discipline: a short-term strong momentum phase should not automatically be interpreted as a lasting regime, especially if it is closely linked to technological concentration.

What institutional investors can derive from this

From the perspective of institutional investors, the absolute level of quarterly returns is less important than the question of which market structure lies behind those returns. The second quarter highlights three relevant points.

First, market breadth has improved, although the high concentration of large technology stocks remains. The positive development across several regions and cyclical sectors points to broader risk appetite. At the same time, the dominance of semiconductors and technology hardware remains an indication that a significant part of performance continues to depend on narrowly defined structural growth themes.

Second, the quarter was difficult for defensive factor profiles. Minimum volatility lagged in Europe, in global developed markets and in emerging markets. This is not unusual in a strong rising market, but it underlines that defensive strategies in such phases should primarily be understood as diversification rather than as short-term performance drivers.

Third, the simultaneous strength of momentum and value deserves attention. This combination is not self-evident. It can arise when market trends accelerate in previously undervalued or cyclical segments. For systematic investors, this is an environment in which valuation discipline and trend information can both be relevant. The challenge lies in distinguishing between fundamentally supported repricing and short-term exaggeration. At Quoniam we address this challenge in a number of ways. First, we include a risk adjustment in our model’s price momentum factors. In the event of a style shift, a less volatile stock with a high momentum score tends to fare better than other high momentum stocks. Additionally, we use our proprietary sentiment scores also as risk factors in the risk model, thereby mitigating the exposure to these sensitive areas.

Outlook: Continuation possible, but more selective

For the remainder of the year, the available data do not allow for a simple extrapolation. The strength of the second quarter points to robust risk appetite and continued interest in AI, technology and cyclical segments. At the same time, the strong performance of individual sectors and factors increases vulnerability to reversals if earnings expectations, capital market interest rates or geopolitical risks are reassessed.

The continuation thesis therefore appears plausible, but not unconditionally strong. It would be better supported if market breadth were to increase further and the recovery were not driven solely by semiconductors, hardware and momentum. Conversely, a renewed narrowing of market leadership would increase the risk that positive index performance is based more on concentration than on fundamental breadth.

For Quoniam, a disciplined multi-factor approach remains central in such an environment. Valuation, quality, momentum and risk signals should not be considered in isolation, but in combination. Especially when markets rise strongly, the distinction between sustainable return drivers and short-term market dynamics becomes more important. This applies particularly where high expectations are already reflected in prices.

Conclusion

The second quarter of 2026 was a strong quarter for equities. Returns were driven by risk appetite, technology leadership and pronounced factor rotation. Emerging markets, semiconductors, technology hardware, momentum and value stood at the center of the move. Minimum volatility and other quality-oriented, defensive profiles, by contrast, lagged.

For investors, the key insight lies not only in the positive market performance, but in its composition. The current environment rewards selectivity, trend strength and cyclical participation. At the same time, the question remains open as to whether this will develop into a broader and more sustainable market regime, or whether leadership will continue to be dominated by a few strong themes. This distinction will be decisive for portfolio positioning in the second half of the year.