Commentary for May 2026

Market Overview

Global equities continued to move sharply higher in May, advancing 5.4% overall. The rally was driven by a combination of forces: hopes for a resolution between the US and Iran, falling oil prices and a surge in technology stocks fuelled by strong earnings and AI demand. It was another excellent month for Asian and emerging markets with gains of 12.3% and 10.6%, respectively, extending what has become a remarkable run for the asset class. Elsewhere, the US, Japan and Europe rose an impressive 6.1%, 5.8% and 3.5%, respectively. Gains in the energy-heavy UK were a more muted 1.2%, although UK smaller companies closed 3.6% higher.

Geopolitics continued to dominate the headlines. Despite the conflict in the Middle East continuing during the month, oil prices fell back below $100 per barrel following signs of progress in peace negotiations. Gold and silver advanced 1.7% and 3.7%, respectively. A report released by the ECB confirmed that gold has overtaken US Treasuries as the world’s top reserve asset. As at the end of 2025, gold accounted for 27% of central bank reserves, up 7% from a year earlier. Meanwhile, the share of Treasuries fell to 22% over the same period.

In sector terms, some of the broadening seen in the first quarter has been reversed in recent weeks, as strong results from companies related to AI have boosted the prospects of growth companies in the US. There was also much excitement ahead of SpaceX’s debut. The company made history with a $75 bn initial public offering that instantly turned it into one of the biggest public companies in the world, putting Elon Musk within reach of becoming the world’s first trillionaire.

US first quarter corporate earnings posted 27% growth, with the global build-out of AI infrastructure remaining the key driver. Semiconductor stocks saw their profitability jump, as a surge in demand from data centres led to a shortage of chips. The accompanying move up in share prices took price to earnings multiples to a nosebleed 60X, challenging the perception of what has historically been regarded as a highly cyclical and commoditised sector that should be valued at a discount. The biggest beneficiaries were TSMC of Taiwan and Samsung of South Korea, which helped drive overall stock gains in Asia. In other areas, the pattern of leadership within technology showed signs of change, as other companies took over the running from the Magnificent Seven giants that have previously dominated the space. Scepticism remained over the sustainability of massive capex and high valuations among previous winners. Nvidia beat expectations and its share price fell, suggesting that the good news is priced in. Alphabet also fell on news that it will sell $80 billion in new stock to fund spending.

Meanwhile, the US economy continues to run hot. The CPI hit 4.2% in May, up from 3.8% in April and the highest rate in three years. The manufacturing sector is gaining momentum while the labour market data remains tight. However, there is concern that AI strength is masking fragility in other areas. The University of Michigan’s Consumer Sentiment Index printed its worst reading since the survey began in 1952. This was underlined as Walmart cut guidance, citing that cash-strapped consumers are trading down to lower margin essential goods.

The US Senate confirmed Kevin Warsh to replace Jay Powell as the 17th Federal Reserve Chair. President Trump appointed Warsh with the expectation that he would cut interest rates. The problem is that he is arriving at a moment when this is genuinely difficult to justify on recent data. The bond markets are currently betting that the next policy move will be higher.

In the UK, inflation data provided some encouragement, with the CPI flat during May at 2.8%, below expectations for the second month running. Alongside weaker labour data, this has strengthened the case for the Bank of England to hold interest rates steady at 3.75% when it next meets, rather than raising them. Policymakers now expect inflation to remain around 3% for most of the year, lower than previously forecast.

Global bonds remained volatile, driven by ongoing uncertainty about the macroeconomic outlook. Yields rose earlier in the month as markets priced in expectations of higher rates but slipped back as the oil price moderated later on. In the UK, bonds came under added pressure from political uncertainty. Following a catastrophic showing in the May local elections, Prime Minister Starmer has reached the end of the road. His likely successor, Andy Burnham, is a clean pair of hands, having not been a part of the current administration. However, markets are questioning how the extra spending implied by a political shift to the left will be funded.

 

Looking Forward

Markets ended May with a flourish that would have been hard to imagine back in March. Strong US earnings and expectations for a peace agreement have supported market confidence. Investors have been prepared to look through the implications for higher inflation and lower growth over the next twelve months. Resilient economic data and company fundamentals in the world’s largest economy have provided a strong anchor for markets despite geopolitical uncertainty. However, signs are emerging that the US economy is running too hot. Investors will need to pay close attention to the bond market, which is now signalling that a rise in interest rates is a real possibility. This could spoil the AI-fuelled party in growth stocks.

In any normal cycle, higher for longer interest rates would be negative for long duration assets (stocks that are priced at a premium valuation to reflect above average growth in the future). We saw this in 1994 under Greenspan, then in 2018 and most recently in 2022, both under Powell, where the market underwent a violent rotation in sector leadership away from growth stocks. The Magnificent Seven are currently among the longest duration in assets in the equity universe and valuations are once again becoming difficult to ignore.

Recent strength in equities has also brought market concentration back into focus. At the start of the year, markets rotated away from the largest stocks in the US market, but since then, the ten largest stocks have seen their market caps grow by 29% to erase the effects of that earlier rotation. The AI trade is looking increasingly crowded. This may set the tone for a shift in market characteristics as we enter the summer months. Fortunately, there are plenty of other sectors and regions that offer good value.

In the event of a peace deal in the Middle East, commodity prices may see a further short-term pullback. However, 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.

 

Our Strategy

Against this backdrop, the outlook for equities remains constructive, albeit with a wider range of potential outcomes. 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.

UK equities offer a source of genuine diversification and value. The market is home to many world class companies that trade at a valuation discount to their international peers. Despite a moribund domestic economy, more internationally focused large caps are forecast to grow earnings by 19% in 2026. M&A activity has continued to rise, supporting the valuation argument for UK companies.

Emerging markets continue to trade at a significant discount to developed market peers, despite a superior outlook for 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. The region is starting to see strong inflows from foreign investors who remain structurally under allocated even after their strong performance in 2025.

Valuations in Japan remain nowhere near as expensive as the US, even though earnings have been growing at a faster pace over the past decade, as corporate reforms in Japan have gathered momentum.

Prior to recent geopolitical developments, oil was arguably the cheapest and most disfavoured major asset class in global markets. Energy equities account for a mere 3% of the total US market capitalisation – barely above the pandemic-era lows. The prevailing view has been that the oil industry belongs to a bygone era, a relic of the industrial past. The same sentiment was evident toward gold in the late 1990’s, shortly before it embarked on one of the strongest bull markets in modern history. Recent events in the Middle East have drawn attention to the level of underinvestment across the industry over the past decade, suggesting that the equilibrium price level will be higher going forward.

Our constructive view on gold and silver remains unchanged. Gold continues to play a critical role as a portfolio diversifier amid geopolitical uncertainty and concerns around government debt and currency stability. At the same time, precious metal mining equities are benefiting from strong pricing dynamics, supporting robust profitability and sector-leading growth.

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.