Commentary for June/July 2026

Market Overview

Financial markets paused for breath during June and July, following an exceptional start to 2026. Global equities closed flat over the period, leaving them up an impressive 10.2% so far this year. Despite the flat headline number, there were some significant moves beneath the surface. The UK performed strongly, rising 4.7%, benefiting from its relatively low exposure to technology and greater weight in sectors that performed well. European markets rose 2.7%, while Japan was up 0.9%. In contrast, the US fell 0.8%, while Asia and emerging markets also saw profit-taking after recent strong gains, closing down 2.7% and 4.2%, respectively. Government bonds yields continued to edge higher across developed markets as resilient economic data and volatile energy prices prompted investors to reassess the outlook for inflation and interest rates.

Geopolitics continued to dominate the headlines. An interim peace agreement between the US and Iran reopened the Strait of Hormuz, setting the stage for 60 days of negotiations over Tehran’s nuclear programme. This sent oil to a 3-month low and sparked a global rally in both equity and bond markets. However, July saw tensions reignite and the US reimpose sanctions and a blockade of Iranian ports. Meanwhile, the Tehran-backed Yemeni Houthis threatened an additional maritime blockade on Saudi Arabia via the Red Sea. The subsequent rise in oil back towards $100 reminded investors that inflationary risks have not disappeared. Markets remained resilient overall as strong economic data and earnings offset rising geopolitical tensions.

The US market pulled back despite a strong start to the second quarter earnings season, as a sharp reassessment of AI expectations rippled through technology stocks. The NASDAQ fell 12%, led by a 20% drop in semiconductor stocks as they unwound some of the speculative excess of recent months. For many of the largest technology companies, simply beating earnings forecasts was not enough to reassure investors, who are growing less patient about funding an investment cycle whose payoff remains uncertain. This anxiety was exacerbated by Alphabet’s reporting of its first quarter of negative free cashflow since listing in 2004, even as it continues to raise investment. The development of more efficient AI models from an increasingly competitive China raised further questions.

Elon Musk’s new listing SpaceX got off to a good start, trading up to $225, a 67% premium to its IPO price of $135. This valued the company close to $3tr, despite revenue of just $34bn. However, profit-taking kicked in and by month end the shares had fallen below their IPO level.

Despite the sharp sell-off in technology the broader market remained healthy as leadership rotated, with strong corporate results driving gains across financials, industrials and energy. Economic data reinforced the view that the US economy remains robust. Forecasts for second quarter GDP growth were revised higher, while a stronger than expected May jobs report pushed a potential cut in interest rates off the table. The ISM manufacturing survey also came in stronger than expected. Inflation hit 4.2% in May, up from 3.8% in April. However, it eased to 3.5% in June, as energy prices retreated from recent highs. At Kevin Warsh’s first FOMC meeting as Chair, the Federal Reserve left interest rates unchanged, as expected, but removed its easing bias, sending a hawkish message to markets. Bond investors responded by pushing yields higher, with the 30-year treasury bond reaching a 19-year high of 5.28%.

Tariffs also returned as President Trump imposed 10% to 12.5% duties on imports from 60 countries, plus extra hits on Canada (50%), Brazil (25%) and pharmaceuticals (100%), replacing the earlier 10% global import tax struck down by the US Supreme Court.

UK equities recorded a healthy gain as improving risk appetite and resilient corporate earnings supported a broad market rebound. Mid and small caps also participated more meaningfully after a period of underperformance. M&A remained elevated with over £60bn of deals so far in 2026 with an average bid premium of 39%, compared to £35bn in the whole of 2025. EasyJet rose sharply as a US-backed takeover bid was priced 100% higher than the May share price low. In the same sector, Jet2 announced strong earnings and a £250m share buyback, equivalent to 10% of its outstanding shares. The results season was also encouraging, with strong figures across financials, energy, mining, aerospace and defence.

Andy Burnham replaced Kier Starmer to become Britain’s seventh prime minister in the past decade. While his leadership suggests a move to the political left, investors took comfort from his commitment to uphold the current fiscal rules, albeit he has suggested with “flexibility” to push borrowing closer to the limits of what the bond market will tolerate, as he seeks to reboot growth.

UK economic growth slowed to 0.4% during the second quarter, down from 0.6%, while unemployment held steady at 4.9%. Inflation dipped to 2.6% in June but is still expected to rise to 3.2% during the final quarter as higher energy prices are passed on. The Bank of England held rates at 3.75% for the fifth consecutive time, but the mood was more hawkish as an increasing number of committee members called for a hike.

The Bank of Japan raised interest rates by 0.25% to 1.00%, a level last seen in 1995. Policymakers also announced a timetable for finally ending quantitative easing, which entails the purchase of Japanese government bonds to keep a lid on yields.

 

Looking Forward

Perhaps the most striking lesson so far this year is what did not happen. Oil prices rose, geopolitical tensions reignited, and technology shares stumbled, yet broader equity markets remain close to record highs. Global economic growth is expected to expand 2.5% in 2026, while companies continue to grow profits at an impressive rate across all major regions. At the same time, geopolitical concerns appear to have become more manageable than markets initially feared. While macro concerns are fading, the biggest risk to markets may come from rising long-term yields as inflation remains stubbornly above target.

The narrative surrounding AI is changing as investors are becoming far more selective about the companies they invest in. The real story behind the recent fall in share prices was not a loss of faith in AI itself but a shift in how the technology majors pay for it in favour of borrowing, as cashflow is no longer sufficient. AI-linked debt has grown to nearly half of all investment-grade issuance this year, leading the IMF to warn that AI leverage is one of their biggest worries. At the same time, competition from China is intensifying. Chinese models are far cheaper and the gap in quality has almost closed, potentially undermining the economics of AI. Overall, we think it likely that the market has largely priced in the first phase of the AI story. The next phase should be driven by companies that successfully deploy the technology at scale, with the potential to raise overall global productivity as the
benefits translate economy wide. Interestingly, other sectors and regions elsewhere have finally started to participate. This widening opportunity set is a welcome development for diversified investors.

The UK has a new prime minister but not a new fiscal reality. Whoever occupies no 10 (North and South) will have to wrestle with Britain’s intractable high debt and low growth problem. Andy Burnham has until October 28th, the date set for the Autumn Budget, to succeed where his predecessor failed. He will need to find policies to boost growth that comply with the existing manifesto and fiscal rules and satisfy both Labour backbenchers and the bond market. No mean feat!

Meanwhile, the FTSE 100 is closing in on the 11,000 level and is now ahead of the S&P500 over the past year, as investors increasingly recognise the merits of undervalued British shares. The gap between what businesses are worth and what the market is prepared to pay for them may finally be starting to close.

The gold price is showing signs of resuming its uptrend, having consolidated previous gains over the past several months. Gold miners look particularly interesting, trading a lower valuation than in 2018 despite generating an unprecedented level of free cashflow. Relative to the overall market, valuations are also among the cheapest on record.

 

Our Strategy

Against this backdrop, the outlook for equities remains constructive, albeit with a wider range of potential outcomes. Our portfolios remain overweight equities and have continued to benefit strongly from market strength.

Looking ahead, markets are likely to remain sensitive to both energy-driven inflation risks and the sustainability of AI-related earnings. These risks call for different diversifiers with a portfolio. We favour regions outside of the US with cheaper valuations, including Japan, Asia and emerging markets, along with the UK. In contrast we are underweight fixed income given the headwinds of elevated inflation and deteriorating fiscal positions of governments across the West. Unlike government bonds, real assets can provide resilience should inflation continue to prove more persistent than expected. Exposure to infrastructure, energy, industrial metals, precious metals and mining stocks provide increased portfolio resilience and an additional source of return.

UK equities offer genuine diversification because of their unique sector make up. The market is home to many world class companies that trade at a meaningful valuation discount to international peers. Earnings are forecast to grow at a respectable 19% for 2026 while M&A activity has continued to rise.

Emerging markets also trade at a significant discount to developed market peers, despite having the strongest outlook for earnings growth. We expect this valuation gap to narrow over time as investors recognise the supportive structural trends that are in place and as they feed through to corporate performance.

Japan continues to enjoy favourable conditions. These include improving corporate governance, rising wages and a decisive move away from the deflation that characterised recent history, helping underpin strong market returns. The Japanese government has recently talked about encouraging more investment domestically. This could be significant as the state pension is one of the largest in the world.

The war in the Middle East has helped catapult commodities up the list of investor priorities. We continue to believe the longer-term picture is that we are in a multi-year bull market, characterised by global stock piling of critical materials in an environment where supply remains limited following over a decade of underinvestment.

Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.