Four observations on asset markets
Despite the war in Iran and the greatest disruption to energy supply on record, this has been a good year for stocks. Global equities are up 9% so far this year, after rising by 20% in 2025. Investor enthusiasm for risk assets has held up well, underlined last month by the biggest IPO in history, as Elon Musk’s Space X listed for $1.78 trillion.
This performance partly reflects the resilience of the global economy – the energy shock has not been as destabilising as initially feared. In April, a net 36% of respondents to the Bank of America Fund Manager Survey expected a weaker global economy over the next 12 months. Last month that number was just 1%.
Besides this overall resilience, here are four emerging themes from asset markets this year.
The 'Magnificent Seven' underperform
Global technology stocks are up 20% this year, extending their bull run to almost three years. If you had bought this basket of equities in late 2022, you would have tripled your investment by now. A group of US tech behemoths, called the 'Magnificent Seven', has come to symbolise this rally. However, their shares have dropped nearly 10% in June, with the group now down 2% since the start of this year. Except Alphabet, all the members of this group have underperformed the S&P500 this year, with Microsoft, Meta and Tesla selling off.
Analysts suggest two reasons for the group’s underperformance. First, investors might be reducing exposure to these US tech behemoths due to concentration risk. The seven firms have collectively risen in value by an astonishing 200% since early 2023, increasing their share of the S&P500 from 22% to 34%. Second, some point to growing investor concerns about the hundreds of billions of dollars these firms are spending on AI infrastructure, despite significant unknowns about payoffs. The Bank for International Settlements recently compared the AI investment boom with the dotcom era, and the railway mania in Britain in the 1840s, concluding that even episodes of genuine technological breakthrough “attracted capital in excess of what the commercial returns could ultimately justify.”
Investors are buying the AI “picks and shovels”
Investors are rotating away from the firms spending billions of dollars on AI infrastructure and towards those producing it. The Philadelphia Semiconductor Index, which tracks US chip manufacturers, is up 89% year-to-date. These valuation increases have primarily been driven by higher earnings. US chipmaker Micron last month reported its profits surged to $28.2bn in its latest quarter from $1.9bn in the same period last year.
This “picks and shovels” boom is not confined to the US market. South Korea’s stock market, KOPSI, is up 90%, driven by chipmaker SK Hynix which has more than tripled in value this year, surpassing Samsung (which is up more than 170%, thanks to its chipmaking arm) as the country’s most valuable company. Shares in Dutch company ASML holdings, which sells machinery crucial to chipmaking, have risen by 87%. ASML now accounts for roughly 15% of the Dutch equity market. Tokyo Electron, a Japanese chipmaking equipment manufacturer, has seen its shares rise by 125% this year.
European defence rally reverses course
European defence stocks were one of the big investment stories of last year. Shares in the sector have been on a tear since Russia’s invasion of Ukraine in 2022, and doubled last year, driven by Berlin’s commitment to significantly raise military spending and NATO allies' agreement to raise defence spending to 5% of GDP. This year, however, that rally has gone into reverse, with European defence stocks down 7%, led by a 30% fall in German defence firms.
As government bond yields have risen – in part due to the expectation of higher inflation delivered by the energy shock, investor concern about how these spending commitments will be funded has grown.
Some equity analysts also point to a shift in the nature of warfare. Emmaneul Cau, head of European equities strategy at Barclays said “investors are looking for more tech-orientated defence stocks” as the conflict in the Middle East has shown the importance of drones. Shares in French drone producer Parrot are up around 35 per cent this year and those in Swedish military IT specialist MilDef have risen more than 50 per cent.
Gold bucks safe haven trend
The price of gold has fallen 23% since the start of the war in Iran, bucking the historical trend of the precious metal attracting safe haven flows in times of economic or geopolitical distress. The fall ends a multi-year rally – the gold price almost tripled in value from the start of 2023 to its peak in February of this year, buoyed by concerns about levels of government debt and inflation, and supported by significant retail investor demand.
Higher interest rate expectations have raised the appeal of interest-earning assets compared to gold, which yields no income while incurring storage costs. A stronger US dollar has also made gold more expensive for non-US investors.
Chart of the week
Recent months have seen a rapid rise in global shipping costs. The Freightos Global Container Index (also known as the Freightos Baltic Index) tracks the average cost of shipping a 40-foot ocean container across 12 major global trade lanes. It shows that global shipping costs have more than doubled since the start of March. Routes into the US have seen sharper rises, with shipping costs from China to the east coast of the US nearly tripling since March.
A number of factors are at play. Importers are front-loading demand due to the risk of future disruption and expectations of rising costs, particularly on cargo into the US. Many anticipate US tariffs to be re-imposed on 60 countries later this month. Indeed, the latest US Purchasing Managers Indices show that recent strength in manufacturing activity is driven by precautionary stock building amid growing supply and cost concerns.
The conflict in the Middle East has meant higher oil and gas prices, which are feeding through to shipping costs with a lag, as shipping companies pay for fuel on a quarterly basis. The conflict has also left vessels stranded in the Persian Gulf, reducing global shipping capacity. In addition, many companies are choosing to sail around the Cape of Good Hope instead of taking the Red Sea route, which has often been disrupted by Yemen's Houthi rebels, thereby extending journey times and costs.
What we're looking out for this week?
Tomorrow, the Bank of England will publish its next Financial Stability Report. The previous edition, published in December, noted a rise in financial risk throughout 2025, owing to greater geopolitical tensions, trade and financial market fragmentation, and pressure on sovereign debt markets. It also noted that equity valuations were "materially stretched", particularly for US technology companies.
Since then, the global economy has witnessed a war in Iran and subsequent shock to energy markets. Yet stocks have rallied. In April, Sarah Breeden, the deputy governor for financial stability at the Bank, highlighted growing risks of a readjustment in risk assets, as well as concerns over a private credit crunch. We will be looking out for the Bank's latest thinking on financial risk (and on the likelihood of a sharp market correction) in tomorrow's edition of the report.
And finally...
A recent study by a team of European researchers found that giraffes may be able to perform simple mathematical calculations. The experiment, which made giraffes at Barcelona Zoo choose between two containers with carrots, after witnessing humans add to or subtract carrot pieces from them, found that the giraffes chose the container with the most pieces 68% of the time - long division