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Trends in portfolio construction

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Q2 2026 investment landscape

Markets bounced back after a shaky first quarter as geopolitical fears were alleviated and oil prices fell from their peaks. Artificial-intelligence-related capital expenditures broadened corporate earnings growth, while an improving labor market helped alleviate concerns of an economic slowdown. Consumer inflation rose in Q2 after the conflict in Iran triggered shipping disruptions and a spike in energy costs. Higher oil prices also passed through into core inflation, which excludes the more volatile food and energy components. Shelter and service costs are exhibiting signs of reacceleration, adding to tariff and Iran-conflict-related inflation in core goods. Despite a constructive macro backdrop, markets are predisposed to potential bouts of volatility as geopolitical and monetary policy uncertainty, inflation persistence, and elevated asset valuations warrant continued emphasis on portfolio diversification.

 

Source: FI Portfolio solutions (2,498 Portfolio Reviews and Portfolio Quick Checks conducted between 4/1/26 and 6/30/26) and Morningstar.

ETF Usage

Sixty-one percent of incoming portfolios in Q2 had some allocation to ETFs—with number keeps growing each quarter. On average, 55% of an advisor’s portfolio is allocated to ETFs which shows the popularity of the investment vehicle. Average expense ratios have fallen from an average of 50bps over the last few quarters to 43bps in Q2. Advisors increasingly prefer low cost index ETFs with 56% having some allocation to the product. The average allocation to index funds was around 30% over the last two years but that rose to 42% in Q2. In Q1, we saw 39% of incoming portfolios with allocation to active ETFs—with an average allocation of 26%, which was higher compared to Q1. To put this in context, this number was 13% in 2022. New active ETF products are being launched across the industry and advisors continue to increase their appetite.

We observed the average portfolio has:

12
holdings
6
different asset managers
43
bps of underlying blended fees

Domestic Equity
Domestic Equity

In Q2, the average equity sleeve of a portfolio was 72%, which has been consistent with the last few quarters. Seventy nine percent of the equity sleeve was allocated to U.S. equities versus 21% in international. This is an increase of 2% to U.S. allocations compared to last quarter. Within U.S. equity, the average portfolio had 65% allocation to large caps, 23% to mid caps and 12% to small caps–similar to last quarter. Growth exposure remained at 29%, but value allocations rose to 33% of the equity sleeve, which is the highest level since 2021. For context, the quarterly average allocation to value was around 26% as of Q4 2025. Tech continues to be the dominant sector exposure in advisor portfolios with an average of 23% in Q2 compared to 21% in Q1. The U.S. remains one of the most attractive major equity market given continued earnings leadership, resilient economic activity, healthy credit conditions, and sustained investor preference for domestic assets. While valuations are elevated in parts of the market, current macro and market conditions continue to support maintaining an overweight. Large cap equities remain best positioned to benefit from resilient economic growth and continued earnings leadership. Technology remains supported by superior earnings growth, strong profitability, and continued leadership within equity markets driven by AI and AI-related development. Similarly, Industrials remain well-positioned to benefit from improving manufacturing activity, continued infrastructure spending, and stable business investment.

Insights:

  • The second quarter of 2026 saw a strong rebound in U.S. information technology and growth stocks, while energy and utilities underperformed.
  • Positive earnings trends have broadened beyond large cap stocks, with forward earnings expectations for small cap companies keeping pace with their mega-cap counterparts. An optimistic earnings outlook underpinned by improving profit margins provides a supportive backdrop.
  • AI-related companies have demonstrated the strongest performance worldwide in recent years, increasing global market exposure to the technology sector. Strong performance from the tech sector draws comparisons to the high-flying markets in the late 1990s/early 2000s, another period of rising market concentration.
  • Markets continued to reward AI-related capital investment, incentivizing several notable hyperscalers to ramp up financing.
International Equity
International Equity

Twenty one percent of the equity sleeve was allocated to non-U.S. equities–which is a decrease of 2% compared to last quarter. This level is far off from the 27% exposure to international we saw in 2021 as advisors have displayed a strong domestic bias. Advisors have 87% of their international sleeve in developed markets and 13% in emerging markets. Almost 27% of portfolios had no international equities exposure in Q2, which is similar to Q1, showing that advisors are not necessarily reallocating away from international markets but are maintaining caution. International equities would likely benefit from a broadening of global growth leadership and a weaker U.S. dollar. While those conditions remain possible, current market leadership, earnings trends, and geopolitical conditions continue to favor U.S. assets. Pockets of active opportunity remain in both developed and emerging markets despite the slowing momentum.

Insights:

  • International equity outperformance was broad-based over the quarter, with EM Asia, especially AI-related technology companies, leading gains globally. Commodities declined in Q2 after peaking geopolitical risk subsided, and gold fell sharply, giving back some of its strong gain in 2025.
  • Over the last year, technology exposure in emerging markets catapulted from 23% to 43%, driven by Taiwan and South Korea, which now account for more than half of the MSCI EM market capitalization.
  • While domestic activity in China remained subdued, cyclical momentum in most developed-market economies stayed intact even amidst elevated energy prices and supply-chain disruptions. Global manufacturing activity remained in expansion as of Q2, overcoming geopolitical uncertainty and volatile energy costs.
  • Equity valuations have risen across regions over the last three years. The market expects a reversion in valuations across all major regions, with forward price-to-earnings (P/E) ratios for the U.S. well above non-U.S. markets, making non-U.S. equity valuations appear relatively attractive.
  • The U.S. dollar rose in Q2, remaining overvalued relative to both developed- and emerging-market currencies. Historically, a weaker dollar has been a tailwind for the relative returns of DM and EM equities (versus U.S. stocks). We believe owning assets denominated in foreign currencies is an important component of portfolio diversification for U.S. investors.
Fixed Income
Fixed Income

Fixed income allocations made up 23% of the portfolio in Q2. This continues to be near the lows of fixed income allocations we have observed in the last two years. Investment-grade allocation was at 83% of the fixed income sleeve, and 17% to high yield. While this breakdown has been generally consistent quarter over quarter, it does continue the trend of a slight uptick to investment grade–with a 2% increase compared to Q1. Fixed income continues to provide attractive income and diversification benefits. However, supportive risk conditions, strong corporate fundamentals, and resilient economic growth continue to favor equities on a relative basis despite improved bond yields. With policy uncertainty elevated and interest rate volatility considerably lower than in recent years, Treasuries offer an increasingly balanced risk-reward profile. TIPS remain attractive given persistent inflation risks, commodity market uncertainty, and inflation expectations that remain above long-term norms. TIPS have continued to provide valuable inflation protection without sacrificing income.

Insights:

  • Despite interest rate volatility and a more hawkish tone from the Federal Reserve, bonds provided positive performance across fixed income markets. Emerging markets led performance in fixed income, where more credit-sensitive assets outperformed Treasuries.
  • Yields were slightly higher across major fixed income categories with tighter credit spreads helping provide an offset. Credit spreads in the Bloomberg U.S. Aggregate Bond Index, emerging market, and high-yield sectors ended the quarter in the lowest quartile of their historical range, providing limited compensation for taking on credit risk. Overall, yields for most fixed income categories stood at or above their 50th percentile, suggesting bond valuations are roughly in line with long-term averages and provide solid income within a balanced portfolio.
  • Nominal 10-year U.S. Treasury bond yields finished Q2 slightly higher. Most of this rise was in real yields attributed to the Federal Reserve’s hawkish tone at its June meeting. Despite actual inflation measures rising, longer-term inflation expectations, as implied by TIPS, fell as markets were comforted by the new Fed chairman’s comments on monetary policy. Outlook for policy is highly uncertain, as there are several reasons why the new Fed Chair could encourage patience before hiking rates.
  • As of the end of Q2, markets expect interest-rate hikes during 2026 and into next year. Markets have so far been able to digest the tightening bias from central banks, but if inflation stays elevated, monetary policy markers’ reaction to inflation could be a key risk to financial conditions and borrowing rates.
Alternatives
Alternatives

In a higher inflation environment, the correlations of stocks and investment-grade bond turned positive, where the performance of stocks and bonds moved in the same direction. This lack of diversification between stocks and bonds led advisors looking at alternatives as an option. Given the policy and geopolitical uncertainty in the current climate, alternatives can provide a good opportunity for valuable diversification.

Insights:

  • In Q2, 11% of incoming portfolios had some allocation to Liquid Alternatives, similar to Q1. The average allocation was around 6%. We noted that 14% of portfolios had an average allocation of 4% to commodities products.

All data points are based on Fidelity portfolio construction reviews and Portfolio Quick Checks (PQC), from 4/1/26 to 6/30/26.

In conclusion

In today’s evolving market environment, maintaining a well-diversified portfolio and staying disciplined are key to achieving long-term investment objectives. Volatility can create meaningful opportunities when approached strategically. Reach out to our Portfolio Construction Guidance team for support in building portfolios designed for today’s markets.

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Diversification does not ensure a profit or guarantee against a loss.

ETFs are subject to market fluctuation, the risks of their underlying investments, management fees, and other expenses.

Indexes are unmanaged. It is not possible to invest directly in an index.

Stock markets, especially non-U.S. markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks, all of which are magnified in emerging markets. The securities of smaller, less well-known companies can be more volatile than those of larger companies.

Although bonds generally present less short-term risk and volatility than stocks, bonds do contain interest rate risk (as interest rates rise, bond prices usually fall, and vice versa) and the risk of default, or the risk that an issuer will be unable to make income or principal payments.

Additionally, bonds and short-term investments entail greater inflation risk—or the risk that the return of an investment will not keep up with increases in the prices of goods and services—than stocks. Increases in real interest rates can cause the price of inflation-protected debt securities to decrease.

Alternative investments are investment products other than the traditional investments of stocks, bonds, mutual funds, or ETFs. Examples of alternative investments are limited partnerships, limited liability companies, hedge funds, private equity, private debt, commodities, real estate, and promissory notes. Some of the risks associated with alternative investments are: Alternative investments maybe relatively illiquid. It may be difficult to determine the current market value of the asset. There may be limited historical risk and return data. A high degree of investment analysis maybe required before buying. Costs of purchase and sale may be relatively high.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

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