Risk-on is back, higher volatility stocks rebound
Equity markets have continued to advance through 2026, but leadership has been highly selective. Since the late March lows, higher risk stocks have led performance, signaling a renewed risk-on regime that has persisted despite ongoing geopolitical, economic, and inflation uncertainty.
Equity investors have had to navigate a challenging macro environment so far this year, characterized by elevated rates volatility, shifting growth expectations, and numerous policy driven headlines. Yet despite this backdrop, the equity Volatility factor has been strongly positive in the year to date, signaling outperformance of higher risk, higher beta stocks. This pattern is consistent with a risk-on regime, rather than a defensive one, and reflects a willingness by investors to re-engage with cyclical exposures despite persistent uncertainty.
Momentum and sector leadership
This risk seeking behavior has been reinforced by strong momentum dynamics; past winners have kept on winning, undeterred by conflicts, politics, or economic noise. Semiconductor-related and technology hardware stocks dominate momentum exposure, reflecting sustained capital investment in AI-related infrastructure1 .
Importantly, there has been an evolution in the nature of investor risk-taking this year. While the start of 2026 was characterized by intermittent and fragile risk appetite, with episodes of defensiveness dominating headlines, behavior since early April has shifted decisively. Risk exposure has been rapidly rebuilding and this has persisted through mid May. The improvement in Volatility factor returns reflects this transition from tentative risk tolerance to active re risking.
At the sector level, software names currently have the largest average volatility exposure in developed markets, although returns have been directly hit by concerns around AI-related is intermediation. Energy has been the next best driver, with company share prices surging on the high oil and gas prices resulting from the Middle East conflict. AI-related hyperscaler stocks have been a major factor in cap-weighted market returns—Even excluding the disproportionate effect of the 10 largest stocks by market cap, semiconductors and energy have been among the largest contributors to high volatility exposure, while software has been a significant drag.
Equity volatility remains benign
Notwithstanding the evolution in risk appetite, equity implied volatility remains largely range bound—this reinforces the view that this has been a risk-on environment rather than a stress regime. Fixed income markets, by contrast, have exhibited somewhat more persistent volatility, highlighting a divergence between equity risk appetite and the uncertainty prices into rates markets.
This type of profile suggests that the risk-on attitude is not confined to a small subset of the universe, but is more pervasive. Higher-volatility names outperformed lower-risk names in 17 out of the 25 GICS2 industry groups within developed markets so far this year.
Benign pricing of risk can persist for extended periods, but phases of high volatility outperformance rarely endure and can retrace rapidly. The current starting point is also challenging in the current market, given elevated valuations and signs that conflict in the Middle East war is starting to have a notable impact on the real economy, as is becoming evident within inflation numbers, for example.
While the current regime remains risk on, the acceleration in risk exposure suggests that forward returns are likely to be shaped more by rotation and dispersion than by broad beta. As ever, the transition from risk taking to risk pricing tends to be rapid. In such environments, diversification across styles, regions, and stocks continues to be important as both insurance and a source of opportunity.
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