Laura Cooper

Key takeaways

• Concentration is not a reason to be bearish but to reflect on what the market is depending on. Earnings season will be an important test on whether the narrow group carrying the market can keep doing so at the pace expectations now require.
• The second half likely requires AI spending to translate into earnings growth across the market and proof that credit can absorb another wave of supply without spreads giving way.
• Until these can be confirmed, our preference is for quality through dividend growers, free cash flow compounders and second-order beneficiaries in electrification, industrials and select software over the most capital-intensive parts of the value chain.

Risk assets have to earn the second half

The best half in recent memory may have just raised the bar for everything that follows as Q2 earnings ramp up in earnest.

Taking stock of H1 2026

Investors navigated a geopolitical crisis, an oil price shock, a hawkish repricing of Fed expectations, and a wave of corporate debt issuance that looks to break historical records. At various points, the inflation narrative looked like it was accelerating, the consumer looked like it was cracking, and the tech trade looked like it was peaking. June alone delivered a ~15% selloff in U.S. software stocks, a move higher in front-end rates, and a U.S. jobs report that showed a sharp slowdown in hiring.

And yet the S&P 500 finished the quarter up close to 15%, the Nasdaq advanced more than 20% and the Philadelphia Semiconductor Index posted its best quarterly performance on record at 88%. Every major fixed income asset class finished in the green, with emerging markets the standout and credit spreads at levels not seen since before the GFC.

By the numbers, it was one of the best halves in recent years, but it rarely felt that way.  The second half sets up with a more demanding backdrop as markets may have priced much of the good news even as the outlook remains resilient.

Limited cushion for comfort

Markets did not deliver those robust returns by taking less risk. They delivered them by absorbing more of it than most people thought possible, and in doing so, they have left themselves with less margin for error.

Consider credit. U.S. investment grade absorbed more than $1.3 trillion of gross supply in the first six months of this year alone, well above the pace seen in recent years. July expectations are for another $150 billion. Yet spreads sit near historical tights, including high yield and emerging markets alike. The same dynamic is playing out in equities, where valuations have risen in lockstep with earnings expectations, leaving the market priced for further execution rather than any meaningful disappointment.

Even in a benign scenario where equities continue making new highs, credit may struggle to rally further from these levels as supply challenges demand, a dynamic that would expose lower-rated issuers to a refinancing headwind that current spreads are not fully pricing. Fatigue is already visible at the margin as new concessions have widened, deal subscriptions have weakened, and hyperscaler-related issuance has underperformed in secondary trading.

The first half worked because the shocks arrived one at a time. A geopolitical crisis here, an inflation scare there, a hawkish Fed repricing somewhere in between. Each was digested before the next one arrived. The second half may not be so accommodating. The pipeline of potential disruption, from a Fed that remains data-dependent with a hawkish bias, a European winter gas supply picture that remains uncomfortably tight, a record issuance calendar that shows no sign of slowing, and potential for Korean contagion risks, does not resolve itself quietly.

Oil spiking more than 15% last week on US-Iran escalations is a reminder of how quickly risks can materialise and directly complicates the margin tailwind from energy that supported first half results.

The room for error that carried markets through the first half has been largely spent.

Concerns over concentration

The first half’s extraordinary returns were not broadly earned. Technology and semiconductor companies are expected to generate nearly 60% of S&P 500 earnings growth in Q2, with consensus penciling in ~24.7% year-over-year EPS growth for the index, the highest expectation heading into a quarter since 2021. The top ten stocks are expected to account for most of that growth. Strip away the current spending cycle and some measures suggest the underlying economy is already losing momentum.

Last week illustrated the tension as early Q2 reporters delivered a ~88% beat rate, with bank earnings broadly strong. Yet the Philadelphia Semiconductor Index fell nearly 10% as investors questioned whether AI-realted valuations remain justified – board beats and sharp selloffs in the same breath.

A similar dynamic is visible in Europe, where headline Q2 EPS growth of around 12% is largely an energy story. Strip that out and underlying growth is closer to 3%, though AI-exposed names and capital goods are emerging as secondary contributors, with the latter benefiting from front-loading ahead of potential supply chain disruption that is now showing up in earnings commentary at levels not seen since the early pandemic.

That concentration is not a reason to be bearish, but to reflect on what the market is depending on. Earnings season will be an important test on whether the narrow group carrying the market can keep doing so at the pace expectations now require.

There is a more encouraging read available. The bar for the median S&P 500 company appears low, making headline beats a greater possibility this quarter given a macro backdrop that remains resilient. Input cost pressures may also ease as energy prices fall with oil finishing the quarter down more than 30% to below $70 a barrel – a direct tailwind for margins across industrials, consumer discretionary and transportation.

The conditions for earnings beats are in place, and the market is broadening just as H2-2026 begins. Whether that broadening in earnings arrives fast enough to reduce dependence on the leaders is the question earnings season will start to answer.

As AI drives most of the market’s returns, are investors being rewarded for picking winners or for being exposed to a handful of names? That’s the tension at the core of our Midyear Global Investment Committee Outlook, what we call the concentration paradox.

What the second half requires

We remain constructive on risk through year-end. The Fed looks set to hold in July and policy is unlikely to tighten from here, a backdrop that can remain supportive for both equities and credit. In Europe, the full year earnings picture looks more constructive, with EPS growth forecast in the mid-teens and second half profit growth expected to pickup, giving the diversification case a forward-looking foundation with a helpful valuation story.

How this translates into portfolios

Constructive is different from complacent. The second half likely requires AI spending to translate into earnings growth across the market and proof that credit can absorb another wave of supply without spreads giving way.  And for consumer’s resilience to hold as savings rates normalise and the energy tailwind eases.

Until these can be confirmed, our preference is for quality through dividend growers, free cash flow compounders and second-order beneficiaries in electrification, industrials and select software over the most capital-intensive parts of the value chain. Outside the US, European banks, defense and industrials offer diversification, while emerging market opportunities remain focused on supply chain beneficiaries and improving governance stories. In credit, selection matters more than spread exposure at these levels and amidst greater dispersion.

The first half was extraordinary. The second half has the ingredients to match it. But it will have to earn it.

By Laura Cooper, Managing Director, Head of Macro Credit and Global Investment Strategist

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Laura Cooper

Key takeaways

• The second and third-order effects of the Strait of Hormuz crisis are only beginning to materialise
• Markets have been complacent and are normalising to the conflict
• Geopolitical risk has shifted from episodic noise to a persistent feature of the investment landscape; investors who understand that distinction will be better positioned for what comes next

Revisiting the rulebook: Three months on

Three months ago, we argued that geopolitics had shifted from episodic noise to a structural force for markets. At the time, that was a framework. Today, it is evidence.

Bottom line up top 

Markets were resilient through 2025 not because the underlying order was intact, but because the consequences of its erosion were still unfolding. Investors were not positioned for a world in which assumptions built over decades – institutional credibility, alliance durability and the limits of political shock – would be tested simultaneously. Political change, we argued, moves faster than market repricing – until it doesn’t. The events of late February may have delivered that inflection point.

From risk premium to real disruption

The Strait of Hormuz crisis did not arrive without warning. Escalating Middle East tensions and the fragility of rules-based international frameworks had been structural risks insufficiently priced by markets. What followed confirmed that assessment with force. The conflict has triggered the largest supply disruption in the history of the global oil market, with flows through the Strait collapsing from around 20 million barrels per day, Gulf producers cutting output by at least 10 million barrels per day and Brent surpassing $100 per barrel for the first time since 2022.

The disruption extends well beyond energy with lasting implications: the Middle East accounts for at least 20% of all seaborne fertiliser exports and the crisis is reshaping supply chains in real time across aluminum, LNG, helium, and petrochemicals. More than 44,000 businesses across 174 economies had at least one shipment exposed as of mid-March. The second and third-order effects are only beginning to materialise.

Three fault lines, now visible

The events of the past three months have clarified three structural breaks:

• First, geopolitical risk has become structural rather than episodic. The U.S. continues to fundamentally reshape its economic and security relationships, pursuing a transactional approach and exposing fractures within traditional alliances. The Hormuz crisis is not an outlier; it is an expression of a broader shift toward boundary-testing.
• Second, Europe was inadequately prepared for a scenario in which U.S. support becomes conditional. Europe is heading toward energy scarcity pricing at a time when its strategic autonomy and rearmament plans are still taking shape.
• Third, the central bank playbook is constrained. The inflation impulse of the energy shock arrives simultaneously with a growth drag: a supply-side shock that conventional tools cannot address. A closure removing close to 20% of global oil supplies is expected to lower global real GDP growth by an annualised 2.9ppts in Q2/2026. Central banks cannot produce oil, and when faced with a stagflationary shock, the tools that address inflation worsen the growth outlook.

The investment implications

The case for geographic diversification, scenario weighting and selectivity within asset classes is stronger today than at the start of the year. In practice, we favour floating rate over fixed credit exposures, including senior loans and pockets of private credit over investment grade duration; energy and upstream assets across equities; hard assets and real return profiles; and we remain constructive, albeit selective, on EM sovereigns where strong external balances offer both diversification and carry where traditional haven assumptions are being tested.

An important portfolio consideration is also what markets are pricing, with complacency increasingly evident. Markets are normalising to the conflict, pricing a base case of partial resolution and gradual resumption of flows. Tail risks from a prolonged closure extending into Q3, further attacks on Gulf energy infrastructure, or escalation that draws in additional regional actors remain underpriced. Outcomes aren’t symmetric, and investors positioned for the base case are implicitly short optionality when it is most valuable.

Bottom line

The Strait of Hormuz crisis is not an aberration from the new geopolitical order – it is an expression of it. Markets are transitioning from a world where geopolitical risk was something to price at the margin, to one where it shapes outcomes. Investors who understand that distinction will be better positioned for what comes next.

By Laura Cooper, Global Investment Strategist and Head of Macro Credit

The post Revisiting the rulebook: Three months on appeared first on AdviserVoice.

Laura Cooper

It is no longer just about owning the winners. It is increasingly about avoiding the losers – those with business models most at risk of disruption. The transition started with digital businesses, yet the software selloff is spilling across asset classes – from heavy software exposure in private credit to pockets of public markets as AI disruption risks rise.

Last week, I had the opportunity to speak with several tech and software investors at Nuveen. One theme kept surfacing: investors are no longer asking ‘who benefits from AI?’ but ‘who gets displaced’. And the selloff is changing that opportunity set in real time.

Markets shooting (software) first, asking questions later

Software has been at the centre of the recent repricing. The rapid advance in large language models is changing the cost of building and delivering software, lowering barriers to entry and intensifying competition. This is challenging existing business models, driving a structural shift from subscription (Software as a Service) to consumption-based pricing, and raising questions about the future of the SaaS model itself.

At the same time, markets may be overestimating the speed of that disruption. Enterprises move slowly, workflows are deeply embedded, and switching costs remain high. Forward revenue multiples have compressed from roughly 10x to 4-6x for many software names, and while a re-rating was warranted, the selloff has been indiscriminate.

This is not a ‘sell all software’ moment – but presents an opportunity for security selection. The sector is experiencing necessary price discovery as the market distinguishes between companies with durable models with pricing power and those facing disintermediation.

Finding the winners among the losers

Our investors remain focused on frameworks to identify companies with demonstrable AI integration, strong network effects, and the flexibility to transition pricing models:

Winners: “Companies operating in categories with high determinism and customisation requirements are best positioned – think design software, vertical-specific solutions, and enterprise resource planning systems. At the vendor level, success favors those with strong data and workflow moats, and usage or outcome-based pricing models.”

Losers: “Service-oriented applications, and creative apps with low customisation needs are particularly vulnerable. Those with weak moats, seat-based pricing models, limited AI progress, and closed ecosystems face heightened disruption risk.”

Security selection, not just a software story

Equity markets tend to reprice first while other asset classes lag, creating a window where risk is reassessed. Yet spreads in parts of the broadly syndicated loan market have already widened by 100-150bps, particularly for issuers with heavier software exposure and more aggressive capital structures. Meanwhile, private credit has increasingly been a source of refinancing for capital structures that were of lower quality, creating pockets of risk in the asset class.

As valuations re-rate and equity cushions shrink, loan-to-value ratios rise, raising refinancing risk and creating less margin for error. While vulnerable issuers at the lower end of the credit spectrum might face refinancing challenges if private credit becomes constrained, the broader, higher-quality loan market should remain relatively insulated from direct spillover effects. And it remains to be seen whether private credit appetite for software will change, or they will continue to provide capital but at wider spreads.

Either way, dispersion is likely to increase not only across borrowers, but across managers focused on the durability of business models.

Big picture: where are the opportunities?

AI is not a bubble technology, but that doesn’t mean every AI bet will pay off. There are companies spending significantly on AI that likely won’t see a return. And the transition from focusing on eyewatering capex to the return on investment has already begun – large, scaled incumbents are investing aggressively not only to innovate, but to protect the moats they have already built with the winners still unknown.

From an opportunity standpoint, the infrastructure and cybersecurity subsectors carry the highest ‘perceived AI safety’. The former is underpinned by strong demand driven by data movement, storage, and analytics. And as AI expands the ‘attack surface’, incremental spending in cybersecurity is likely to remain resilient in this relatively unique part of the market.

In contrast, the application layer is most exposed. This is where the user interface sits, where disintermediation risks are highest, and where the shift from SaaS will be felt most acutely.

Still early stage of AI supercycle

For investors, the passive exposure to software is no longer the same bet in was three years ago. The index-level trade has become a stock-picking story. In credit, the same logic applies where selection and credit differentiation matter more now than in recent years.

The AI investment thesis hasn’t disappeared – it’s just evolving. The recent selloff reflects a repricing within a transformative AI cycle, and periods like this tend to create fatter tails: more winners, but also more losers. The opportunity lies in identifying this flip: who will win versus who will lose.

By Laura Cooper, Managing Director, Head of Macro Credit and Global Investment Strategist

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