Markets rebounded sharply in the second quarter, marking a dramatic reversal in risk sentiment from the war-induced sell-off earlier in the year. The second quarter was defined by the ongoing conflict in the Middle East and intermittent negotiations between the United States and Iran.

The conflict brought the Strait of Hormuz, a vital shipping corridor carrying roughly one-fifth of the world's oil and gas trade, to the brink of shutdown. West Texas Intermediate crude surged above $110 per barrel in the first week of April before retreating below $70 by quarter-end, near pre-conflict levels.

Nevertheless, the temporary spike in energy prices contributed to higher inflation expectations. Inflation is now projected to rise from 2.6 per cent in 2025 to 2.9 per cent in 2026 across developed economies, and as a result, central banks continue to balance the need to contain inflation against the risk of slowing economic growth.

Despite these geopolitical headwinds, global equity markets posted impressive gains, rebounding sharply since the war's onset, with the S&P 500 gaining 15.2 per cent for the quarter.

Investor sentiment improved as corporate earnings significantly exceeded expectations, oil prices fell, and investors increasingly anticipated that central banks would maintain or gradually ease monetary policy. US equities led the advance, driven by technology, communication services, and select industrial companies, while developed international and many emerging markets also delivered positive returns.

In fixed income markets, inflation concerns remained the primary driver of bond yields. Market expectations shifted from anticipating interest rate cuts to pricing in at least one 25 basis point rate increase before year-end. New Federal Reserve chairman Kevin Warsh reinforced this shift, emphasising the central bank's commitment to returning inflation to target. Consequently, five-year Treasury yields rose above 4.2 per cent, while 20-year Treasury yields approached 5 per cent.

Looking ahead, investors can still find attractive opportunities across the major asset classes. Within equities, we expect market leadership to broaden beyond the AI infrastructure companies that have dominated returns over the past several years.

Although the beneficiaries of AI capital spending should continue to perform well, a growing number of AI adopters are beginning to distinguish themselves by using advanced computing to improve productivity, expand margins, and gain market share.

Several leading financial institutions, for example, are already demonstrating measurable operating improvements through the deployment of artificial intelligence.

While we expect leadership within technology to broaden, we do not believe the artificial intelligence investment cycle is nearing an abrupt end. Barring an unforeseen geopolitical shock, the sector appears to have further room to run.

Since the introduction of ChatGPT, the Philadelphia Semiconductor Index (SOX) has risen approximately 415 per cent, compared with an 884 per cent advance during the 1994 to 2000 internet buildout, while the tech-heavy Nasdaq has gained roughly 146 per cent, versus 546 per cent during the dot-com era.

More importantly, the current cycle has been supported by robust earnings growth rather than valuation expansion alone. The Nasdaq’s forward price-to-earnings ratio has remained around 25x, compared with an expansion from roughly 15x to more than 60x during the 2000 technology bubble.

Likewise, Nvidia, arguably the AI vanguard, currently trades at approximately the broader market multiple on one-year forward earnings, a sharp contrast to Cisco Systems, which traded at well over 100 times earnings at the peak of the internet boom.

While valuations warrant continued discipline, today's AI-driven market appears to rest on a much stronger fundamental foundation than the speculative excesses of the late 1990s.

• Bryan Dooley, CFA, is the chief investment officer at LOM Asset Management in Bermuda. Please contact LOM at 292-5000 or visit www.lom.com for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority