It’s been a really good year for equities so far. Paradoxically, this is sowing the seeds of anxiety. Valuations are higher, so people are worried about a correction. Subdued volatility has stoked fears of renewed turbulence.

Stock returns have been solid across many regions. Japanese and emerging-market (EM) stocks led the second-quarter gains, while US large-caps also did well (Display, left). Smaller-cap US stocks underperformed as hopes for a broad tax cut that would benefit smaller companies faded. The MSCI World Index rose by 2.7% in the second quarter in local-currency terms to finish the first half up 8.3%, even after market moves during the last trading week of June signaled a potential shift in investor sentiment.

GROWTH AND STABILITY

Let’s dig a bit deeper into this year’s shifting market trends. Growth stocks surged in the first six months of 2017, while value stocks underperformed—a sharp reversal of last year’s trading patterns (Display, right). Cyclical and defensive stocks posted strong returns, while resources trailed the market in another turnaround from 2016.

We think there are three explanations for these trading patterns. First, after last year’s US election, the market was driven by hopes that President Trump’s administration would unveil a series of policies to stimulate the US economy. These expectations fueled an increase of interest rates from historic lows, which buoyed value stocks, whose recovery prospects are helped by reflation and a cyclical rebound. This year, as political turmoil dampened hopes of major fiscal stimulus, interest rates have stalled, and as a result, cheaper and riskier stocks have underperformed.

Second, as anticipation of a US-driven growth burst have receded, investors have preferred stocks that look capable of delivering strong and steady long-term earnings growth in any economic environment. For example, companies like Amazon.com and Google are seen as big beneficiaries of long-term transformational changes in retail and technology. Beyond the US technology sector, some growth-oriented companies should do well amid relatively solid global economic growth conditions.

Third, oil prices have affected equity market trends. After rising through 2016 to about $55 a barrel, prices of US crude oil (WTI) have fallen by 18% this year to end the quarter at $46 a barrel. The slump in energy stocks has also hit value indices, which are heavily exposed to the sector.

GLOBAL GROWTH CONTINUES

There’s plenty of good news underpinning these trends. Global economic growth continues to proceed at a steady, moderate pace. Inflation is generally subdued, so developed-market central banks will probably withdraw their relaxed monetary policies very gradually in the coming months.

The US economy is doing well without additional fiscal stimulus. Unemployment is at a 16-year low of 4.3% and consumer spending is robust. In the euro area, the recovery continues to strengthen and broaden. Brexit negotiations add uncertainty to the region, but the French election result—with a strong, moderate, pro-reform government led by President Emmanuel Macron—has eased political risk substantially.

Japan’s outlook is also improving, helped by fiscal and monetary stimulus as well as solid manufacturing activity and exports. Emerging markets are also doing particularly well. Many EM countries have brought domestic inflation under control and shored up their currencies. As inflation has become more benign, producer pricing power has improved, benefiting EM companies’ margins and driving earnings growth as well as improved credit metrics.