Welcome, everyone, and thank you for joining me today. We'll walk through the July 2026 Blackrock student of the market, our monthly look at what's driving markets and more importantly, what it means for portfolios going forward. What I'll focus on today is separating the headlines from the underlying trends.
Because while markets have been strong recently, the bigger question for investors is what's actually driving performance and how durable are these trends. Slide two. We'll look at the agenda on the equity side. We'll look at the historic second quarter, the Magnificent Seven changing role market concentration and the.com versus AI comparison plus volatility around midterm elections.
On the bond and alternative side, we'll cover long term bull market and bear market capture ratios, stock bond correlations and how alternative funds behave when interest rates are higher. Each slide is built to stand on its own, so hopefully you're able to incorporate a slide or two into end investor conversations.
Stocks actually slipped 9/10 of a percent in June. But don't just let that overshadow the quarter. The second quarter is roughly 15% gain. Ranks as the 13th best quarter for US stocks since 1950. That's out of 306 quarters. The biggest message is on the right. Historically, strong quarters have tended to be followed by more gains, not a reversal across the best quarterly periods since 1950.
The average one year return following has been solidly positive. There are exceptions. 1987 and 99 were followed by declines. So it's no guarantee for clients worried about they've missed it. This is a useful reminder that momentum has historically carried forward, and selling after a strong run has often been the worst instinct.
For two years, the story has been The Magnificent Seven. In 2026, that story is changing year to date. The Magnificent Seven as a group has trailed the broader S&P 500. Returns within the group have become far more varied.
Look at the dispersion. Alphabet is up double digits, while Microsoft and Meta are actually down meaningfully this year. In 2023, all seven beat the index so far in 2026, just one has. The takeaway for clients is that leadership is broadening and that, and that's healthy returns are less dependent on a handful of names.
It also makes the case for diversification and active security selection rather than assuming last cycles. Winners keep winning. Slide five. This is one to sit with the top ten holdings. How? Make up a record share of the S&P. Six straight years above 30% and concentration jumped from 24% in 2022 to 39% in 2025, the largest increase on record.
Why does that matter? History shows that when concentration has been elevated, average annual drawdowns have tended to be larger. A caveat that this sample size is small, so we hold this loosely. The practical point for clients is risk. A cap weighted index today carries more single stock and single sector risks than it did a decade ago.
That's a natural opening to talk about, complementing an index position with more diversified exposure. Slide six. Everyone wants to know if AI is another.com bubble. The data offers perspective. In the last seven years through 1999, tech stocks returned about 1,097% seven straight years of nearly 20% or better.
Today's AI driven run is strong, but far more modest. Roughly 569% over the current stretch, versus 292% and 237% for the broad market in each era. So tech is leading, but nowhere near the vertical melt up of the late 1990s. The other difference worth raising with clients today's leaders are highly profitable companies with real earnings.
Unlike many common names, this isn't a promise valuations can't correct. The 2022 bear market is right there on the chart, but the comparison suggests were not in 1999. Slide seven. With midterm elections this year, investors will ask what it means for markets. Since 1930, the average return in a midterm year has been just 7%, well below the long term average in these years tend to be cheaper.
Here's the nuance that matters. The number of big daily swings is what separates good years from bad. When volatility stayed subdued, fewer of those 2% or greater trading days midterm years often delivered solid gains when big swing days piled up, returns suffered. The message for clients isn't the trade around the elections.
It's to expect some noise. Stay the course. Reacting to headline volatility has historically been the costlier mistake. Slide eight. This is my favorite slide for the investor who wants to time the market. Starting in 2026, $1,000 fully invested in US stocks grew to about 23.7 million. But investor who captured 85% of every bull and bear market, giving up some upside but also sidestepping some downturn, ended up with 24.9 million.
Actually, more. No one can capture exactly 85% reliably. So that's not the instruction. The point is, you don't need to catch every last bit of the market to build real wealth over time, and avoiding the worst of the drawdowns matters enormously over time. For anxious investors, this frames the goal from perfect to invested and disciplined.
The stock bond correlation is normalizing. And that's good news for balanced portfolios from 2022 through 2024. We lived through something historically rare 14 months where stocks fell and bonds fell right alongside them, the longest such stretch in investing history. That's what made 2022 so painful.
The ballast wasn't working, and the three year rolling correlations hit levels we hadn't seen in decades. But look at what's happened since the start of 2025. In the last six months, stocks lost money. Bonds were positive in four of them. Correlations are retreating from those historic highs. For clients who soured on the 60/40.
This is evidence that bonds are starting to play defense again. Slide ten. The fed is expected to hold rates steady for the foreseeable future, and higher for longer is actually a favorable backdrop for liquid alternatives. Looking at average annual returns since 2001, categories like macro trading, tactical allocation, and multi alternative strategies have historically performed well in higher interest rate environments, partly because they earn more on cash collateral and because higher rates creates the dispersion.
These strategies feed on for clients sitting in cash or worried that both stocks and bonds look fully priced. Alternatives can provide a third source of return with different drivers. A natural diversifier. In summary, while markets have delivered exceptionally strong performance 13th best quarter in Q2 of 26 since 1950 and the momentum often continues, investors should still focus on the underlying drivers rather than the headlines.
Equity leadership is broadening beyond the Magnificent Seven, suggesting a healthier, more diversified market. Though, elevated market concentration remains a source of risk. Comparisons between today's AI driven rally and the dotcom era indicate the current technology leaders are supported by stronger fundamentals and earnings.
Looking ahead, investors should expect increased volatility surrounding the midterms, but avoid making investment decisions based on short term headlines. Keep your politics out of your portfolios. I always say history shows that staying invested and limiting downside during market declines has been more important than capturing every bit of upside on the fixed income side, stock bond correlations have begun to normalize.
Restoring bonds portfolio role as a diversified hour. Finally, with interest rates expected to remain higher for longer, liquid alternative strategies may provide an additional source of diversification and return and balance portfolios. Thanks for listening. We'll see you next month on BlackRock's student of the market.
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