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Q2 2023 market update: Artificial intelligence leads equity market rally

Q2 2023 market update: Artificial intelligence leads equity market rally

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Building on the momentum of Q1 2022, equity markets rose steadily in the second quarter, driven by easing inflation and expectations of an end to the Fed’s tightening cycle. Equities significantly spiked in June (+7%) as technology stocks rose on the wave of interest in artificial intelligence (AI), lifting the broader equity market’s return to +9% for the full quarter.

Fears of an impending recession have largely subsided, bolstered by solid economic data and a thriving equity market. However, this has set expectations for the Federal Reserve to maintain higher rates for a longer period. Despite pausing the rate hikes in June, Fed Chair Jerome Powell suggested the need for further increases due to the economy’s continued resilience as evidenced by a robust labor market (nonfarm payrolls) and significant economic growth. While the existing policy is restrictive, Powell contents it may not be sufficient and has not been in place long enough. Notably, the Commerce Department recently revised GDP growth upwards, indicating a 2% annual rate in the first quarter, up from a previously reported 1.3%. This adjustment reflects stronger-than-anticipated consumer spending, further evidencing the economy’s robustness.


U.S. equities realized steady gains early in the quarter, followed by a defining spike in June, primarily driven by moderating inflation, a “hawkish pause” in rate hikes, and an artificial intelligence boom. Growth stocks (+12%) significantly outperformed value (+4%) in back-to-back quarters, while large-cap (+9%) continued to outperform both its mid-cap (+5%) and small-cap (+5%) counterparts. The technology and consumer discretionary sectors were the top performers once again, supported by prospects of a less aggressive monetary policy, and a strong rally in chipmaking technology stocks. Conversely, energy and utilities both inched lower.

International equities posted modest gains (+3%) during the second quarter of 2023 thanks to a boost in semiconductor stocks. However, the European Central Bank (ECB) continues to fight an uphill battle in its attempt to tame inflation. Although the ECB raised interest rates twice during the quarter, inflation remained higher than expectations at 5.5%, and growth data indicated that the eurozone entered a mild recession over the winter with declines of -0.1% in both Q4 2022 and Q1 2023. Emerging markets, while positive for the quarter (+1%), lagged developed market equities with tensions between the U.S. and China being a driving factor. China underperformed amid concerns of a weaker-than-expected recovery.

Fixed income

The second quarter of 2023 demonstrated a notable shift in sentiment for Fixed Income markets, driven by evolving monetary policy expectations and volatility in short-term Treasuries from the debt ceiling standoff. The second quarter started on a promising note for U.S. bonds as they initially extended the rally from Q1, but the optimism swiftly turned to pessimism as investors grappled with the notion that lower rates may not be on the immediate horizon.

The Bloomberg Aggregate index returned -0.84% for the second quarter. High yield was the top performing category, returning 1.75%, followed by corporates, -0.53%, and U.S. treasuries and TIPS were the worst performers, returning -1.42% and -1.38% respectively. Within treasuries, treasury bills (<3-months) were the top performer, returning 1.25%, followed by short-term treasuries (1-3 years) which returned -0.60%, and intermediate and long-term treasuries were the worst performers which returned -1.15% and -2.30% respectively.

The 10-year U.S. treasury yield, indicative of long-term inflation expectations and economic growth, climbed by 33 basis points to 4.06%. Similarly, the 2-year treasury yield, often reflective of short-term interest rates, rose by 81 basis points to finish at 5.47%. Thus, the yield curve remained inverted on a 2s/10s basis by 106 basis points, underlining the continued economic uncertainty.

Emerging market debt rallied in Q2, whereas world government bonds delivered negative returns as the European Central Bank and the Bank of England implemented further rate hikes.


Commodities fell during the first quarter (-2%) with industrial metal (-9%) and energy (-3%) leading the negative returns. Within industrial metals, zinc, nickel, and aluminium prices all sharply declined.

Livestock (+9%) attempted to boost the broad commodity basket during the second quarter with feeder cattle (+21%) and live cattle (+11%) leading the charge. In precious metals, both gold and silver ended the quarter in the red.

Real estate

REIT’s saw positive returns during the quarter, jumping close to 2% for the second straight quarter. Apartments (+9%) and the healthcare (+8%) were the top performing property sectors, whereas diversified real estate (-4%) and manufactured homes (-4%) were the worst performing sectors. Prices bounced back from a year where REIT prices were suppressed due to rising rates, and the frequency of real estate deals have fallen. Residential real estate prices remain at all-time highs and house hunters are feeling the pinch. Declining home affordability comes as the median single-family home has risen 10% during the second quarter – one of the largest quarterly increases in the past decade. We continue to wait and see if this spike is spurred by the seasonal ebbs and flows, or if high real estate prices are here to stay.


Through all the volatility we’ve experienced over the past year, equities and fixed income have recovered nicely in the first half of 2023. It’s critical to be sure that your plan is well-positioned to handle volatility that the second half of 2023 could bring.


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