Welcome, everyone, and thank you for joining me today. We'll walk through the June 2026 Blackrock student in the market, our monthly look at what's driving markets and more importantly, what it means for portfolios going forward. This presentation is broken up into two main sections stocks and then Bonds and Alternatives.
On the equity side, we've got a handful of things starting with first a strong April and May for US stocks, which we'll put into historical context. Then the small cap come back and whether that leadership shift is sustainable. We'll also look at how artificial intelligence and energy related stocks are driving earnings and performance.
We'll review midterm election drawdowns, which is timely given where we're at in the cycle. And importantly, we'll spend time on emerging market stocks continuing to lead. Finally, we'll step back and look at economic expansions and recessions to better frame the broader macro backdrop. Then on the bond.
On the alternative side, we'll cover a couple of things. First, the significant rise in money market assets and performance versus bonds in fixed income. And then how? Alternative funds have improved over time, both from a return and a diversification standpoint. So overall, think of this as moving from what's driving equity markets today into.
Broader portfolio positioning, especially with cash bonds and alternatives. With that framework in mind. Let's start with what's been a very strong recent period for US stocks. April and May of 2026 ranks among the best two month periods for US stocks. Going back all the way to 1950 with a return of 16.3%.
So this is just a good couple of months. It's historically significant. Now the key question for investors is what tends to happen after periods like this. If you look at the historical data on the left, most of the top two month rallies, whether it's 75, 2009, 2020, were followed by strong returns over the next 12 months.
In fact, if you average the forward returns after the 15 best two month periods, the market is delivered roughly 23.5% over the following year. So the historical pattern is important. Big rallies often happen early in stronger market cycles, and more often than not, they've been followed by continued momentum, not immediate reversals.
So the takeaway is the strong short term returns guarantee future gains, but rather they tend to reflect improving fundamentals or sentiment. And historically they've been more associated with ongoing upsides than peaks. So as we think about today, this slide is reinforcing a key message. The recent rally doesn't necessarily mean we're late in the cycle.
In many cases. Historically, it's been more consistent with markets building momentum. And with that context in mind, let's look more closely at where leadership is shifting within equities, starting with small caps Year to date in 2026, small caps have been have had a very strong run. Small caps are up about 43% versus roughly 30%.
For large caps that's 13% outperformance spreads. So on the surface this looks like a meaningful broadening of market leadership, which is something investors have been looking for. But the key message of the slide is more nuanced. If you look at the longer term data on the left, what you see is the periods of small cap outperformance tend to be episodic and short lived.
And the chart on the right reinforces that. After prior peaks and small cap performance, whether it was 2010, 2013, 2017 or 2021, large caps typically regain leaderships in the following year. So while we're seeing strong small cap performance today, history suggests these bursts of outperformance don't always persist.
With that in mind, let's move on to what's driving a big portion of earnings and performance in the market today AI and energy. This slide breaks down that that that down in two ways. Earnings growth and actual stock performance here today. Starting with earnings the divergence is pretty striking. AI related companies are now seeing roughly 41% year over year earnings growth.
Energy companies are even higher at 68% compared to that just 8% for the rest of the market and 22% for the S&P 500 overall. So what this tells you is that earnings growth is not broad based. It's heavily concentrated in a few key areas. Now if we look at performance we see a similar story. AI stocks are up about 20% on a median basis year to date.
Energy stocks even stronger up 30%. Meanwhile, the rest of the market is up just 2% versus about 11% for the overall S&P 500. So again, performance is being driven by a relatively narrow set of sectors. So tying this back to the prior slide on on small caps. Yes, we're seeing some broadening at the margins, but the core engine of performance is still energy and AI.
With that in mind, let's transition to another historical pattern that can that can impact investors behavior, how markets behaved during midterm election years. Look at the data going back to 1928. There are two consistent takeaways. First off, volatility is normal. The average drawdown during midterm election years is about 20%.
And even this year, we've already seen a drawdown of roughly 9% year to date. So pullbacks during these periods are not unusual. They actually are part of the historical pattern. Second recoveries have historically been strong. On average. Markets have rebounded about 32.9% in the year following the drawdown.
And if you look across the table, even in the years with negative returns or large drawdowns, the following year is often delivered strong performance. So the message here is behavioral. Midterm years often bring uncertainty and volatility. But historically they've also created opportunities with strong recovery once uncertainty clears.
So rather than reacting to volatility this is really about maintaining discipline through the cycle. With that backdrop let's turn to one of the areas seeing the strongest performance globally emerging markets over the past 12 months. Emerging market stocks are up about 50% compared to roughly 30% for US stocks.
That makes this the strongest period of outperformance for emerging markets since 2010. Now, what's important here isn't just the magnitude. It's a trend to happen next. Historically, when emerging markets have periods of significant outperformance, that leadership tends to persist following periods where E.M. outperformed by 20% or more.
They delivered positive returns on average in the next year. Conversely, after periods of significant underperformance. Returns have tended to remain weaker. So just like we discussed with momentum, with momentum in US stocks, leadership in emerging markets tend to have some staying power. From here, we'll zoom back out to the macro backdrop, specifically where we are in the economic cycle.
Now let's zoom out and look at the broader economic backdrop, because this is ultimately what supports or challenges markets over time. The key message on the the slide is that current economic expansion is still relatively young by historic standards. If we look at the data going back to 1926, the average economic expansion is five plus years or roughly 61 months.
And since 1982, expansions have been even longer, averaging about 100 months. By comparison, the current expansion that began in 2020 is still well within that recent range. Bringing this back to today, economic data has continued to surprise to the upside, particularly in areas like housing, retail and labor.
For investors, that matters because market downturns tend to align more closely with recessionary environments, and if the expansion continues, it provides an ongoing tailwind for risk assets. From here, let's transition to what investors are doing with cash. The role of money markets in portfolios today.
The big headline is the cash on the sidelines is historic highs. Money market assets have grown to about 7.8 trillion as of May 2026, up significantly from prior cycles. So there's a massive amount of capital sitting in cash today. Now, it's easy to understand why cash has delivered strong recent returns, especially with higher short term interest rates.
But the key point of the slide is the cash still has still lagged most fixed income categories.
About 91% of all bond funds and ETFs have outperformed cash.
And you see that in the chart. Cash is earning roughly 3 to 4%. While areas like multi-sector bonds, nontraditional bonds are higher. So the takeaway is that cash is bad. It hasn't. The takeaway is cash has been competitive but not optimal, and investors may be giving up return, potentially by saving staying overly allocated to cash.
Finally, let's look at alternatives which are playing an increasingly important role in portfolios. This slide highlights two key improvements over time. Higher returns and better diversification. Starting with returns on the left, the three year rolling return for all alternative funds has risen meaningfully from about 3.6% back in 2016 to roughly 9.2% more recently.
So, compared to a decade ago, all alternatives are now delivering much more competitive return profiles. At the same time, diversification has improved. Correlations with stocks has declined from around 0.68 and earlier periods to about 0.33. Today, that's important because lower correlation means alternatives are providing more meaningful diversification benefits and helping reduce overall portfolio volatility.
So the combination here is powerful higher returns with better diversification versus stocks from portfolio construction perspective. There are two two key takeaways. First. Alternatives today are not just about downside protection. They can play a role in both return generation and risk management.
Second, as we think about everything we've covered concentrated equity leadership, elevated cash balances and evolving bond opportunities. Alternatives. Alternatives can serve as a complementary allocation to help smooth returns, reduce reliance on traditional stock bond correlations, and improve overall portfolio resilience.
So the key message here is that alternatives have evolved meaningfully and their role in portfolios has become more compelling over time. So in summary, markets have been historically strong, have seen a historically strong rally which typically points to continued momentum. But leadership remains somewhat concentrated, primarily driven by AI and energy stocks, where there are early signs of broadening, including small caps in emerging markets.
Sustained leadership shifts are not fully established. At the same time, the broader backdrop remains supportive. The economic expansion is still intact, and volatility, especially in in an election year, is normal, with record levels of cash on the sidelines and alternatives offering improved diversification.
The key message is to stay diversified, avoid over concentration and be positioned to capture opportunities across global equities and income oriented assets. Thanks for listening. We'll see you next month on BlackRock's student of the market.
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