Barometer: Analyzing 2Q portfolio trends

Against numerous ‘backdrops’, broad global equity indexes posted strong double-digit gains in Q2. The Iran War, the spread of AI, volatile oil prices, a new Fed Chair and historic IPOs all affected returns. But equity markets, ultimately driven by strong earnings, rose above the fray to post a historically strong quarter. During Q2, we observed:

• Active management remained dominant: Advisor portfolios held active allocations at 80%, matching the high-water mark for our observations, reflecting continued confidence in active strategies amid volatility and uncertainty.
• A cautious approach to portfolio risk: The Diversified Portfolio beta eased to 0.58, and correlation risk fell to a multi‑year low of 0.48, indicating a balanced stance of market participation and risk management. 
• Global diversification persists: Domestic equity allocations dropped to 74.9% while international exposure reached a new high in our analysis of 25.1%, as developed international and emerging market allocations increased. 
• Equity composition shifted toward growth and tech: Large‑cap exposure stayed elevated, with a rotation back into growth (20% vs.17% the prior quarter), a continued favoring of technology across portfolios, supported by strong sector performance. 
• Fixed income tilts defensive and higher quality: Durations were extended to 5.21 years, investment‑grade allocations rose to 84.6%, and cash declined — signaling a move toward quality credit and away from liquidity holdings. 

Advisors take an active stance

Advisor portfolios continued to favor active management in 2Q26, with allocations holding steady at 80%, matching the prior quarter’s peak over the last few years. This persistence underscores advisors’ conviction that active managers possess the tools necessary to address market volatility. At the same time, portfolio risk metrics reflected a measured stance. Diversified Portfolio beta eased to 0.58 from 0.60, interrupting a gradual upward trend earlier in the year. Although still above 2025 lows, we believe the decline signaled a balanced risk approach — advisors are not making significant tactical adjustments to equity and fixed income allocations within their model portfolios. In parallel, correlation risk fell to 0.48, the lowest level since 1Q23 — toward the end of the Fed’s rate hiking cycle — and extending a period of subdued cross-asset correlations. Together, lower cross-correlations and improved return dispersion across asset classes, styles and regions have enhanced diversification benefits and supported more effective portfolio construction.

Non-US equity continues to play

Also notable, advisors continued a shift toward global diversification. We saw their domestic equity allocations decline further to 74.9%, their lowest level in the analysis period begun in 1Q 2023. We believe this trend stems less from near-term performance and more from a longer-term rebalancing thesis. The adjustment was primarily funded through increased exposure to developed international equities, with emerging markets also contributing meaningfully.

The converse to lower domestic equity allocation is that international equity allocations rose to a new high of 25.1%, reflecting increasing confidence in non-US return drivers. Following strong international performance through 2025 and into early 2026, advisors have increased these opportunities within portfolios. Moreover, it appears international returns have become less dependent on US dollar movements than in prior cycles, reinforcing the diversification case and encouraging broader global balance.

Movement within international equities remained concentrated in Europe and the Asia-Pacific region. While Europe retained the largest share at 43.4%, its allocation declined from the prior quarter, as Asia Pacific rose to 40.2%, nearing parity. This reallocation reflects a tilt toward developed Asia markets, such as Japan, Taiwan and Korea, and away from Europe and the UK, where slower growth and persistent headwinds continue to weigh on outlooks.

A noticeable tilt toward growth

Allocations measured at the security level, as we do, reveal a more nuanced picture than fund-category classification alone. Model portfolio large-cap exposure remained elevated at 69%, but within that segment, there was a clear rotation: large growth increased to 20% from 17%, partially reversing a prior value tilt. The move coincided with a renewed strength in growth-oriented areas, particularly semiconductors and artificial intelligence-related companies, which reasserted leadership during the quarter.

Mid cap allocations held at 21%, though the internal composition continued to evolve. The long-standing value tilt within mid cap has moderated, while strong performance among small-growth names has driven their migration into the mid cap universe, contributing to a more balanced style profile. Small-cap exposure remained stable within its typical range of 10% to 12%, reflecting continued selectivity.

Over the longer term, style and capitalization trends have shifted meaningfully. Since the inception of the analysis, reclassifications of major technology names from large growth to large blend have altered apparent exposures. At the same time, mid cap allocations have moved toward a balance between value and growth. These dynamics underscore the importance of understanding classification methodologies when interpreting allocation trends and constructing portfolios.

Technology at the forefront

Technology outperformed broadly, and its weight in the FTSE Global All Cap Index increased from 25.3% to 31.1%. Advisor portfolios also increased exposure, though more moderately, from 27.8% to 30.1%, indicating participation in the rally, while mindful of trend-following.

Technology continued to represent the largest sector exposure, driven by both strong realized and expected performance, as well as a long-standing structural bias toward the sector. Meanwhile, some data providers classify Amazon and Tesla as Consumer Discretionary, with their substantial market capitalizations further highlighting strong investor demand for companies that are highly dependent on advanced technologies to drive their operations.

Fixed Income: More duration risk, higher-quality credit

In fixed income portfolios, we observed duration continue to extend to 5.21 years, moving beyond the historical four- to five-year range. This extension reflects the continued repositioning that began in late 2025 following rate cuts, as managers moved further out the curve in search of yield and total return.

Credit positioning also shifted meaningfully. Investment-grade exposure in our survey increased to 84.6%, while high-yield allocations declined to 15.4%. This de-risking occurred alongside a tighter BofA Merrill Lynch US High Yield B Option-Adjusted Spread versus 10-year Treasurys, which fell from 3.61% to 2.99%, prompting a preference for higher-quality credit and more conservative positioning.

Finally, fixed income sector allocations saw modest adjustments. Allocations to US Treasuries and agency motgage-backed securities increased incrementally, while cash-equivalent exposure declined, indicating that fund managers put cash to work over the quarter. These shifts collectively reflect a gradual rotation toward income-generating assets while maintaining an emphasis on quality and liquidity.

(Not so) emerging trends

The benefits of portfolio diversification are not always obvious in a short time frame. From value to non-US, emerging markets to small-caps, several long-in-the-making trends continued in Q2. While the overhang and long-term fallout from several major macro factors have yet to find resolution, the underlying trends supporting economies and markets shaped by both local and global forces appear to be holding steady.

For more insights from the Portfolio Construction Solutions team please read their recent Perspectives on market volatility