U.S. stock funds surge 17.1% in Q2 as AI rally fuels records

The average U.S.-stock fund posted a 17.1% total return in the second quarter, the best since 2020, as the S&P 500 and Nasdaq hit record highs.

"Today's investment environment is noisy — geopolitical gyrations, volatile short-term economic data and the incessant thrum of prediction markets all contribute to the cacophony," said Saira Malik, chief investment officer at Nuveen. "Many investors feel compelled to stick to the AI trade."

The S&P 500 and Nasdaq posted their strongest quarterly gains since 2020, while the Dow Jones Industrial Average also closed the period at a record. International-stock funds lagged with a 10.9% average return, pulling their year-to-date gain to 10.6% after earlier outpacing their U.S. counterparts. Investment-grade bond funds returned 0.8% in the quarter, bringing their year-to-date advance to 0.70%, according to LSEG data.

The rally drew $103.1 billion in net inflows to U.S.-stock funds during the quarter, a sharp reversal from the $23.7 billion withdrawn in the first three months of the year, according to Investment Company Institute estimates through June 24. Bond funds attracted $231.5 billion. The question for the second half is whether the Federal Reserve's signal of a potential year-end rate hike — delivered at Chairman Kevin Warsh's first policy meeting in June — will temper the momentum.

Tech Concentration Raises Questions About Breadth

The quarterly performance was powered overwhelmingly by AI-related technology stocks, a narrow leadership that has some strategists urging diversification. Malik recommends looking beyond the AI trade to a broader mix of asset classes, including alternative credit and municipal bonds, rather than lumping all AI stocks in the same basket.

The average U.S.-stock fund has now gained 13.4% for the year to date, recovering from a sluggish first quarter when investors pulled a net $23.7 billion from domestic equity funds. The turnaround in flows reflects renewed conviction in tech names tied to artificial intelligence, even as the Fed's indication of a potential rate hike introduces a headwind for valuations that have expanded alongside the rally.

Fund Flows Reveal a Shift in Investor Positioning

The $103.1 billion that flowed into U.S.-stock funds in the second quarter marks a dramatic swing from the first quarter's net outflows, according to ICI estimates. International-stock funds attracted a more modest $26.5 billion, while bond funds remained the preferred destination for yield-seeking capital with $231.5 billion in net inflows.

The quarter also featured the SpaceX initial public offering, an oil shock tied to the Iran conflict, and a peace rally that briefly boosted markets before the Fed's June meeting refocused attention on monetary policy. The Fed's decision to hold rates steady — with nine officials projecting at least one quarter-point hike by year-end — sets up a potential test for equity valuations. The central bank's next meeting in September will be the first opportunity for Warsh to deliver on his pledge to shake up Fed communications, after the central bank issued a significantly shorter policy statement following its June 17 rate decision. Minutes from that meeting, due this week, will be parsed for insight into what Warsh called a "good family fight" over rates and the chairman's new task forces.

This article is for informational purposes only and does not constitute investment advice.