June was a month of of mixed fortunes for financial markets. Early enthusiasm around the artificial intelligence (AI) investment theme that has driven much of this year’s gains gave way to growing concerns over how effectively that spending will ultimately translate into profits. This shift occurred despite a continued fall in oil prices as tensions surrounding the US-Iran conflict eased. Central bank policy added a further layer of uncertainty, with the Federal Reserve’s new chair hinted at higher interest rates in the US and this ECB counterpart announced its first rate rise in over three years.
Source: Bloomberg
As signs emerged of an end to the Middle East conflict, risk appetite increased and stock markets, in the main, delivered positive returns. Excitement surrounding the SpaceX stock market launch and generally robust earnings from major AI infrastructure companies boosted technology shares, but the NASDAQ reversed sharply towards month-end, when a global tech sell-off took hold. Investors began questioning whether the vast sums being committed to AI infrastructure could be justified by the returns being generated, prompting a broad reassessment of valuations. Announcements of increased capital spending by AI hyperscalers and large band The declines were significant in several markets: the technology-heavy Nasdaq fell more than 2% in a single second issues from these growth-oriented businesses spooked the markets. It was not just US stocks that struggled – South Korea’s Kospi dropped sufficiently to trigger a trading halt, while Japan’s Nikkei suffered a fall of more than 3%.
Investors are beginning to reassess the pace at which AI investment is likely to translate into tangible earnings growth. As a result, some profits were taken and capital rotated into other areas of the market. At the same time, renewed speculation around higher US interest rates increased pressure on growth shares while investors feared whether valuations could be supported by future real earnings.
This backdrop resulted in considerable divergence across global equity markets. The Nasdaq was the weakest major index, ending the month down 0.6%, while the UK FTSE 100 and EU equities gained 1.5% and 3.4% respectively, benefiting from their lower exposure to technology and AI-related stocks. Emerging market and broader Asian equities experienced heightened volatility throughout the month but ultimately finished with modest gains.
Source: Bloomberg
Bond markets experienced a similarly divided month. During the first three weeks, government bond yields rose and prices fell. The European Central Bank delivered its first interest rate increase in almost three years, while the Federal Reserve’s decision to leave rates unchanged was accompanied by guidance that suggested the trajectory for rates is higher. Inflation-linked bonds underperformed during this period as falling energy prices reduced the value of the inflation protection they provide. The mood shifted in the final part of the month, however, as heightened equity market volatility prompted investors to seek safety in government bonds, resulting in a strong rally across core government markets.
Corporate bond markets remained resilient as strong company results continued to underpin valuations. They continue to offer attractive levels of yields relative to history, alongside significantly lower volatility than equity markets.
Overall, fixed income returns were relatively muted. Nevertheless, bonds broadly fulfilled their traditional role as a diversifier, helping to cushion portfolios against equity market weakness during the final weeks of the month.
Looking beyond June, it is worth reflecting on the year-to-date given the significant shifts that have taken place in the investment environment. Despite geopolitical tensions, changing inflation expectations and evolving monetary policy, global equity markets have generally delivered strong returns. However, leadership has remained narrow. Emerging markets and Asia ex-Japan have been among the strongest performers, each rising by around 25% in euro terms, supported by the AI and memory-chip cycle benefiting Taiwanese and Korean technology companies. Japan has also produced impressive year-to-date returns, helped by ongoing corporate governance reforms, share buyback activity and a weaker yen. While the US has benefited from strong technology sector performance, losses earlier in the year have muted year-to-date gains relative to other regions. The UK continues to lag due to its greater exposure to value-oriented, defensive sectors. However, this same composition has highlighted the diversification benefits of UK equities during periods of weakness in growth and technology stocks, as seen during June.
These market movements reflect an evolving macroeconomic backdrop. Central banks have shifted from discussing interest rate cuts to rate increases, oil prices have retraced to levels seen before the US-Iran conflict escalated, and currency markets have remained comparatively stable, with the US dollar regaining some ground against the euro this year. At the same time, AI-related revenue growth remains robust, sector capital expenditure continues to increase and markets are witnessing a new age of large-scale technology IPOs. The speculative element of the gold price increase has faded with prices down 15% in the quarter.
Taken together, these developments reinforce the importance of maintaining diversified portfolios. While the AI investment cycle and the direction of central bank policy remain the dominant market drivers, June served as a timely reminder that leadership can shift quickly, and diversification remains one of the most effective tools for navigating an increasingly complex investment landscape.
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This publication was prepared by Bernard Walsh, Head of Investments & Pensions for Fairstone Asset Management DAC trading as Fairstone & askpaul.
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