In the continuing battle between machines and humanity, Wall Street has sided with machines.
While gas prices spiked to $5 because of the Iran war amid other signs of rising inflation, nothing could stop an incredible rally in artificial-intelligence-related stocks in the second quarter. The average fund in Morningstar's technology category gained 40%, and even that understates AI's impact: Software companies threatened by AI coding assistants were a drag on returns while AI chip makers doubled, or in some cases, tripled, like Micron Technology. The $48 billion iShares Semiconductor exchange-traded fund surged 95% in the quarter and is now up 170% in the past year.
Is it any wonder that tech stocks now account for 39% of the S&P 500's portfolio and were the primary drivers of the $1.7 trillion Vanguard S&P 500 ETF's 15% second-quarter return? If you include Alphabet, Amazon.com, Meta Platforms, and Tesla, which the benchmark doesn't categorize as tech stocks, that 39% weighting swells to 53%.
Can the good times continue? Consider that Nvidia -- the largest AI chip maker and now the world's largest company -- has a market capitalization of $4.85 trillion, greater than the gross domestic product of India or the national net worth of Brazil. Nvidia has about 42,000 employees, while India and Brazil have 1.5 billion and 214 million people, respectively. Is each Nvidia employee worth $115 million to the market, or does Wall Street value Nvidia's chips more than entire nation-states?
One can see AI's influence in every top-performing Morningstar fund category last quarter. The second-best fund category after tech was equity digital assets, up 35%. That might seem counterintuitive, as the category's best performer, the CoinShares Bitcoin Mining ETF, up 81%, invests in the stocks of cryptocurrency miners like Cipher Digital. After all, the $43 billion iShares Bitcoin Trust fell 14% in the quarter, and the average digital-assets fund buying crypto directly was down 15%. But Cipher and other miners have pivoted their businesses toward AI by repurposing their mining facilities as data centers. Cipher's stock was up 90% in the second quarter.
The fourth- and fifth-best performing fund categories -- Pacific/Asia ex-Japan Stock and diversified emerging markets, up 23% and 21%, respectively -- are both heavily invested in Taiwanese and Korean semiconductors. The top three holdings of the popular iShares MSCI Emerging Markets ETF are Taiwan Semiconductor Manufacturing, 15% of the fund; Samsung Electronics, 8.6%; and SK Hynix, 8.3% -- all chip-related. SK Hynix alone gained some 228% in the quarter.
It matters which benchmark foreign ETFs track. The designers of the $163 billion Vanguard FTSE Emerging Markets ETF don't consider South Korea an emerging market, so the fund excludes Samsung and SK Hynix. Thus, the iShares MSCI ETF had a 22% return last quarter versus Vanguard's 11%.
This quarter's third-best performing fund category, small growth, up 24%, has a hefty 22% average tech weighting, yet its story is more interesting. While the 123% quarterly return of a top holding like Bloom Energy, which sells fuel cells to AI data centers, was a driver for iShares Russell 2000 Growth and other small-growth funds, other factors are at play. Otherwise, the average small value fund, which is only 11% tech, wouldn't have also gained 15%, matching the tech-heavy S&P 500. Small companies with domestic operations have been benefiting from a reshoring of U.S. industry and generous R&D tax write-offs for small businesses.
Still, Needham Small Cap Growth, which with a 62% return was the best-performing small-cap fund in the quarter, has a 73% tech weighting and just 70 stocks in its portfolio. Its largest holding, chip maker Arteris, up 196%, helped a lot. Another top quarterly fund, Fidelity Enhanced Small Cap Core, up a strong, if much smaller, 27%, has a more diversified portfolio, with a 19% tech weighting and 778 stocks. A small-blend fund, it could prove more defensive if the tech tide turns. On the small value side, First Eagle Small Cap Opportunity and Fidelity Small Cap Value were also strong, with only 22% and 14% tech exposures, respectively.
Growth stock funds beat value ones in general last quarter -- not a surprise given growth managers' affinity for tech stocks. The tech-heavy $490 billion Invesco QQQ, tracking the Nasdaq-100 index, gained 28%. More interesting is how the designers of the Nasdaq-100 changed the rules of the benchmark in the second quarter to allow for the fast-track inclusion of the newly public and now $2 trillion SpaceX only 15 trading days after its June 11 initial public offering. That, plus coming IPOs of major AI firms, will shift the Nasdaq and other index funds in the future.
Aside from crypto funds, the few other down sectors this quarter were all natural-resources or commodity related. The $36 billion State Street Energy Select Sector SPDR, the largest fund in the equity energy category, was down 13% and the category overall down 7.1%. The worst category was equity precious metals, with the largest $23 billion VanEck Gold Miners down 17% after soaring 156% last year. This cool-off was long overdue. The $130 billion SPDR Gold Shares, which invests directly in bullion, was down 13%.
It was another uneventful quarter for bonds. The $394 billion Vanguard Total Bond Market ETF was basically flat, up 0.7% in the quarter, and has gained only 0.7% this year as investors wait for some more clarity on interest rates, with new Federal Reserve Chairman Kevin Warsh navigating an uncertain inflationary environment.
Bonds are a necessary ballast to a diversified portfolio, and their yields are decent right now. Investors haven't lost faith in them. During the first two months of the quarter, $29.7 billion of new investor money went to intermediate core bond funds. (June data aren't available yet.) Vanguard's Total Bond Market ETF shares got $6.1 billion of that.
Large blend funds received the largest inflows -- $67.7 billion -- followed by technology funds, at $35.5 billion. The Vanguard 500 fund snagged $42.4 billion in large blend flows by itself. Meanwhile, the new Roundhill Memory ETF, which launched this April, was tech's most popular fund, raking in $10.7 billion because unlike other tech ETFs it combines U.S. memory chip companies like Micron with South Korean ones like SK Hynix. Given that the S&P 500 is already tech-heavy, this trend is more worrying.
Then again, the third most popular category was taxable money-market funds, that is, ultralow-risk cash, with $34.9 billion in inflows. The battle between greed and fear over AI continues.
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(END) Dow Jones Newswires
July 02, 2026 01:00 ET (05:00 GMT)
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