Global equities advanced in the second quarter, but the path was rocky. Incoming earnings reports will provide important clues about how companies are coping with mounting challenges—from trade wars to global growth—and how investors should position.

US and European stocks outperformed, while stocks in Japan and China declined (Display). Financials and cyclicals led the gains. Value stocks trailed growth stocks. The MSCI World Index ended the quarter up 3.6% and has surged 16.7% in the first half of the year, in local-currency terms.

Why Are Markets So Volatile?

Despite the solid first-half gains, performance patterns were unsteady. Four months of strong gains in early 2019 were disrupted by sharp May declines, as trade fears resurfaced to dominate market sentiment. Markets have been volatile since the fourth quarter of 2018 (Display above, right); during three of the past nine months, global equities posted sharp declines.

Recent volatility reflects growing concerns that the global economy is in its late-cycle stages after a decade of steady growth. Yet this cycle has several unusual features. The pace of GDP growth has been modest. Even after a series of Fed hikes, interest rates are extremely low and unlikely to rise soon, given renewed central bank pledges to maintain loose monetary policies. On the other hand, rising populism is threatening to unravel decades of globalization and trade integration, with unpredictable consequences for companies and stocks.

Against this backdrop, financial markets are delivering mixed signals to investors. While equities reach new heights, low bond yields—with the 10-year US Treasury yield at about 2.0% and the yield curve inverted at times—reflect pessimism about the outlook. However, yields are being suppressed, in part, by continued aggressive liquidity measures by central bankers, particularly in Europe and Asia.