AI rally papers over a fragile market as old hedges stop working

Global equities have pushed to record territory, but the gains are being generated by a remarkably small group of stocks, almost all tied to artificial intelligence, according to FTSE Russell's June 2026 Asset Allocation Insights report.

Since markets rebounded from their April low, fewer than 15 names accounted for more than half of the total return produced by the FTSE All-World Index, the report found. That share rises to 75% once the wider technology sector is included, prompting the report's authors to warn that "leadership is very narrow."

The report's authors describe the main beneficiaries as "picks and shovels" of AI, largely hardware-focused names in semiconductors and memory chips rather than software providers, a distinction the report says is now a c.50 percentage point YTD performance spread within the FTSE All-World Technology industry.

That spending is also doing heavy lifting for the broader economy. The report notes that AI capital expenditure by hyperscalers is expected to grow more than 50% year over year in 2026, topping $600 billion, and continuing on to over $900 billion by 2028, even as consumer activity stays subdued and other growth measures soften.

Diversification under pressure

The report's most significant message for portfolio construction may be the shift in correlations. Equity and bond returns have moved increasingly in lockstep this year, with the rolling 52-week correlation between the two asset classes rising to +0.44, against a 10-year trend of -0.2.

That reduces the cushioning effect bonds have traditionally provided in balanced portfolios. Within fixed income, the relationship between nominal and inflation-linked bonds has also tightened to +0.88, which the report says limits some of the inflation-protection benefit that linkers typically offer.

Even so, the report argues value is reasserting itself. Government bond yields look attractive relative to their own history, while corporate credit spreads remain close to 10-year lows, leaving little room for further compression.

Equity valuations have come down from extreme levels earlier in the year, though the report flags that the signal looks "extreme" specifically for US stocks when forward earnings yields are compared with the 10-year Treasury yield.

Emerging market reshuffle

Clients with emerging market exposure should also note a structural shift highlighted in the report. Taiwan has overtaken China as the largest constituent of the FTSE Emerging Index, with its weighting climbing from roughly 19% a year ago to about 33%, driven by gains in TSMC and MediaTek. TSMC alone now represents close to 17% of the index, a level of single-stock concentration that advisers may want to flag when discussing EM allocations with clients.

Energy security, stemming from disruption around the Strait of Hormuz, is named as a parallel theme running through the report, with the FTSE Environmental Opportunities Index up 21.6% year to date as the conflict accelerates interest in alternative energy sources.

Taken together, the report's findings suggest advisers may need to look past index-level numbers and assess how much of a client's diversification benefit is, in practice, still intact.