A volatile Q2 ended with more positives than negatives

Author

Melissa Brown

Head of Investment Decision Research

Q2 2026 looked potentially chaotic: an Iran/Hormuz shock, Fed leadership uncertainty, a packed political calendar but surprisingly, the positives outweighed negatives with several markets posting some of their best quarterly returns on record. Tech drove the bulk of returns and risk in the US, Japan and Emerging Markets, pushing EM past the US as the riskiest region, while style factors behaved as expected.

Q2 2026 Equities Review: Risk & Performance

Q2 2026 had every ingredient for a rough quarter: a continuing war in Iran impacting the Strait of Hormuz, a Fed chair whose term was set to expire, and a stacked geopolitical calendar. Instead, positives outweighed the negatives. The Supreme Court struck down the "Liberation Day" tariffs, the new Fed leadership contender stayed focused on inflation over politics and strong Q1 earnings – especially in Tech – pulled the US market back from its worst-performing annual start among developed and emerging peers.

The result: several markets posted some of their best quarterly returns on record, with the US turning in its 10th-best quarter since at least 1982.

The story underneath those returns was Tech, Tech and Tech. It drove the bulk of returns and risk contribution in the US, Japan and Emerging Markets and pushed EM sector concentration in Tech above 60 percent of risk. That concentration came at a cost: EM is now the riskiest region globally, a reversal from mid-pack at year-end, with its risk relative to Developed Markets at an eight-year high.

Drawing on the Axioma suite of equities risk models, here's what drove this quarter's calmer-than-potential chaos. Download the full slide deck to learn about:

How the required risk premium on US Small Caps is shrinking
The handful of South Korean and Taiwanese stocks now dominating EM benchmark risk
Which equity and macro factors moved against expectations

Whether you manage risk or portfolios, the full analysis will help you head into Q3 with a clearer picture of the risk landscape in Q2 and where risk is currently concentrated.

Download slides

FAQs

FAQs Why did Emerging Markets become the riskiest region in Q2 2026?: EM equity risk rose roughly 25 percent in Q2, driven largely by outsized swings in Tech names, which now account for more than 60 percent of the region's risk contribution. That pushed EM's risk relative to Developed Markets to an eight-year high, reversing its mid-pack position at year-end.

FAQs Why is Tech concentration a growing risk in Emerging Markets?: EM's benchmark risk is increasingly dominated by just two South Korean stocks, which drove the index sharply higher earlier in the quarter and then reversed by month-end. More broadly, Tech's concentration in EM, now well over 60% of risk, is concentrated in South Korea and Taiwan, where it accounts for almost all market capitalization. Together, this has sharply reduced the effective number of names investors are really diversified across.

FAQs Are US small-cap stocks still riskier than large caps?: Less than they used to be. The risk premium on US Small Caps over large/mid caps fell from almost 50 percent higher to just 10 percent higher in Q2 2026 – well below the long-term median of 23 percent higher.

FAQs What drove risk up in Q2 2026?: The performance of Tech relative to other sectors led to higher index weights. Because Tech names tend to be riskier than those in other sectors, the “portfolio composition” effect was a major reason risk rose, even as factor volatility fell. In turn, factor volatility fell because asset correlations continued to decline, as they have been doing for several quarters.

FAQs Does increased Tech concentration impact style returns?: Despite the concentration of performance in a single sector, style factors across most regions produced returns in the expected direction, albeit with larger-than-expected magnitudes in Q2 2026. Medium-Term Momentum had a particularly strong quarter, Value and Profitability fared well, and, unsurprisingly with markets so strong, high Market Sensitivity soared. High magnitudes led to higher factor volatility, of course.