As we reflect on the events of the second quarter, it is increasingly evident that we are witnessing a persistent tale of two markets in the U.S. It’s been the best of times for the largest U.S. stocks which have consistently delivered exceptional returns, fueling much of the stock market's ascent to all-time highs. These companies, characterized by strong fundamentals, sustainable growth prospects, and resilient business models, have exerted a disproportionate influence on global stock market performance. The U.S. stock market is now more concentrated than ever, with the top ten stocks representing 35% of the S&P 500. Even during the dot-com era, the combined weight of the top ten stocks peaked at only 25%, albeit the technology companies of today have stronger profitability and more sustainable business models. To look at it another way, the Magnificent 7 stocks are now worth more than the combined stock markets of Japan, Canada, and the U.K. Stripping out these seven stocks, the rest of the U.S. market has performed in-line with the rest of the world since the beginning of 2023. While some sectors and companies have shown resilience and growth, a significant portion has not kept pace with the highflyers.

In the last 18 months, generative artificial intelligence, or GenAI, has inspired the world’s imagination for a brighter future, a future where we can get things done more easily and contribute to solving problems from healthcare to climate change, to education, to poverty and hunger. Some have equated the transformations that AI might bring to the industrial revolution or the introduction of electricity. Before we get carried away, what exactly is GenAI? In its simplest definition, GenAI is the ability of computer systems to process vast amounts of data, learn from it iteratively and present solutions in a very timely manner, sometimes better and faster than our own human intelligence.

Incredibly, we’re now four years removed from the start of the COVID-19 pandemic, which ushered in a period chock-full of uncertainty. We witnessed the uncertainty personally, a lived experience that will never be fully conveyed in future generative AI searches. But we also saw it expressed in the global stock market. Sharp stock market moves, whether up or down, typically result from significant surprises — an unexpected event, technological innovation, or profit impact that companies or investors did not foresee. Perhaps we can define a sharp reaction as a stock market that is up or down by more than 5% in a calendar quarter — an annualized move of more than 21%. Over the past four years, 81% of quarters have seen a move in the All Country World Index (ACWI) global stock index of greater than 5%, including this past quarter. How does that compare with prior years? In the dozen years immediately preceding the pandemic, only 56% of quarters had moves of more than 5% in either direction. The start of the 2020s has certainly been far from boring.