Market Review & Outlook

Market Review

July 2026

After a difficult end to the first quarter, equity markets led a strong recovery during Q2 as fears around the Middle East conflict and energy disruption eased. Risk appetite improved as oil prices fell back from their April peak, inflation concerns moderated, and investors refocused on resilient economic activity, healthy corporate earnings and the significant investment cycle linked to artificial intelligence (AI).

The quarter began with markets still digesting the impact of higher energy prices, disrupted shipping, and uncertainty over how central banks would respond to renewed inflationary pressure. The growing prospect of Middle East de-escalation and a reopening of the Strait of Hormuz helped diminish fears of a sustained disruption to energy supplies and reversed much of the earlier oil price shock, allowing markets to resume their focus on the broadly supportive backdrop for global economic growth and corporate profits.

AI remained a dominant market theme. After earlier concerns around the scale of investment and the potential disruption to parts of the software sector, investor confidence improved as major technology companies continued to signal substantial spending on data centres, semiconductors, and related infrastructure. This supported a renewed rotation into technology and growth stocks, while also benefiting selected industrial and global companies exposed to the AI supply chain.

Central banks were generally cautious, balancing the risk of energy-related inflation against signs that underlying inflation pressures were not broadening materially. The Bank of England kept the UK base rate at 3.75% during the quarter, while global investors continued to debate whether the next move from major central banks would be to cut rates, hold for longer, or respond to renewed inflation risks.

Equity markets delivered a strong quarter, led by the technology-heavy markets such as South Korea, Taiwan, and the US. International equities saw a sterling terms gain of 14.4%, resulting in a 6-month return of 12.8%. UK equity gains were limited by its lower technology exposure and greater sensitivity to energy and commodity sectors, with the FTSE All-Share index gaining 4.7% in the second quarter and 7.2% over the first half.

Performance Chart

A - FTSE All World ex UK TR in GB (12.81%)
B - FTSE All Share TR in GB (7.22%)

Total return income reinvested. Pounds Sterling.
Data from FE fund info 2026

Most fixed income markets saw modest Q2 gains. UK government bond yields were resilient to domestic political events, gaining comfort from the avoidance of a drawn-out leadership campaign and reassuring words over commitment to the existing fiscal rules. Gilts gained 2.0% in Q2 and 0.1% over the first half. Corporate bonds, high yield, and emerging market debt also delivered positive returns over both periods, supported by further evidence of robust corporate health.

Elevated gilt yields and geopolitical uncertainty continued to constrain the UK commercial property market, but returns were supported by income, rental growth, and solid occupier demand in areas such as logistics and retail parks, with an estimated first half return of around 2%. Overseas real estate and infrastructure markets are seeing some modest underlying growth as relevant funds continue to build their allocations.

Market Outlook

Key Takeaways

2026 again demonstrated the welcome resilience of the global economy and investment markets to challenging geopolitical developments. Initial concerns over events in the Middle East have eased as conflict de-escalation and lower oil prices have helped sustain the broadly positive investment environment, with the artificial intelligence investment cycle continuing to provide an important source of economic and corporate growth. 

Background Investment Environment

Heightened geopolitical risks and ongoing conflicts remain a potential cause for concern, but markets have taken reassurance from the recent easing of Middle East tensions. The impact of higher energy prices and disruption to shipping routes proved less problematic than anticipated, and although the worst-case scenario for energy supply has receded, any renewed escalation could still impact market sentiment.

The fall in oil prices during the quarter should help reduce some of the near-term inflation pressure created earlier in the year. This gives central banks more flexibility than appeared likely at the start of Q2, although they may remain cautious until there is clearer evidence that energy-related price pressures have not become embedded in wages or broader core inflation. The medium-term outlook still points towards lower interest rates over time, but the timing and pace of any cuts remain uncertain.

US political policy remains a source of potential market volatility, but investors have learned not to overreact to announcements from President Trump, and history shows it is important for investors to remain focused on the key fundamental longer-term drivers such as growth, inflation, interest rates, and valuations. 

Elevated government debt levels and ongoing budget deficits are a challenge in many countries including the UK, and bond markets may demand higher yields if debts are not seen as sufficiently under control. There are plenty of current headwinds to controlling government spending, such as higher defence spending and challenging demographics, and the new UK Prime Minister and chancellor will need to reassure investors that they have credible plans to keep budget deficits under control. However, despite these debt challenges, several countries continue to lean on fiscal support to underpin growth, most notably Germany through significant spending plans for defence and infrastructure.

Economic and Rates Outlook

Inflation and interest rates remain key factors for investors. The recent reversal in energy prices has reduced the immediate risk of a more persistent inflation shock, but central banks will remain vigilant, and markets are still pricing in interest rate increases in some countries to subdue inflation risks. The European Central Bank has already responded with a rate increase, and the new US Federal Reserve governor has suggested they will also move in 2026, but the Bank of England seems happy to hold UK rates for now, and it is still hoped that rates may be able to move lower over the medium term.

Despite subdued economic expansion in much of the developed world, the global outlook remains reasonably robust at around 3% growth, supported by the US and emerging market economies, fiscal spending and continued corporate investment. The AI infrastructure build-out remains a particularly important support for activity and earnings, although investors will increasingly require evidence that the spending is being converted into durable productivity improvements and broader profit growth. This will be central to justifying elevated valuations across parts of the AI supply chain.

Cash and Investments Mix

Cash remains a useful low-risk asset and can play an important role alongside other investments, particularly since interest rates have returned to more normalised levels in recent years. However, the UK bank rate is currently 3.75% and the medium-term direction is still likely to be lower if inflation continues to moderate. Cash returns are therefore unlikely to match the longer-term return potential from diversified investment assets, so it remains important for investors to strike the right balance to suit their risk appetite, time horizon, and growth objectives.

Fixed Income Assets (Bonds)

Within fixed income assets, prospects have improved after the increase in yields from the exceptionally low levels of the previous cycle, returning to their traditional attractions of providing useful income and diversification benefits within mixed asset portfolios. However, the fiscal sustainability challenges for many governments will keep a focus on policy credibility, especially for the new UK leadership, and bond markets remain vulnerable to any further inflation shocks. UK 10-year government bonds (gilts) yield almost 5% and offer a useful premium compared to other developed markets. Corporate bonds, high yield, and emerging market debt offer higher income to compensate for greater potential risk. Corporate balance sheets overall remain in reasonable shape, and default rates are relatively low, so while additional yields over gilts (spreads) are narrow by historic standards, overall yields continue to offer attractive levels of income.

Equities (Company Shares)

Equity markets have again shown an impressive ability to look through short-term uncertainty, especially when earnings growth remains supportive. Their recent recovery was helped by lower energy prices, resilient economic data, renewed confidence in the AI investment cycle and strong corporate earnings results alongside increasing forecasts. 

Whilst there will be winners and losers from AI, it has the potential to be a significant multi-year development for markets, and credible evidence of widespread, profitable adoption would be supportive, with benefits spreading beyond the core AI technology leaders. These large technology and AI-related companies remain important drivers of returns, but leadership has also broadened at times to include other sectors, and growth has been less dominated by the US than previously. Some areas are more fully valued after strong gains, and profits remain vulnerable to renewed geopolitical or inflation shocks, but with overall earnings forecasts remaining healthy many equity valuations are still reasonable by historic standards. Equities remain prone to bouts of volatility, but their long-term track record remains strong, and we retain conviction in their ability to provide relatively attractive longer-term income and growth opportunities for patient investors.

Within equities, the US retains many structural advantages including a large domestic and growing economy, plentiful energy supplies, a vibrant financial ecosystem, and corporate leadership in key innovative areas such as technology. However, after a prolonged period of US equity outperformance, concerns over elevated valuations, political uncertainty and developments such as China’s emergence as a credible competitor in areas like AI and electric vehicles, have encouraged investors to reconsider the merits of markets beyond the US. While we recognise the strengths of the large US market and retain a meaningful allocation there, we continue to diversify towards other more attractively valued markets such as Europe, Japan and emerging markets which also have their own merits.

UK equities have faced some structural headwinds such as persistent outflows from institutional and private investors, a subdued domestic economy, and a limited exposure to listed technology stocks. However, valuation and dividend income levels remain attractive compared to other markets, as recognised by ongoing takeover interest from overseas buyers and private equity. It also contains many high-quality multinational companies across a variety of sectors, and as investors consider greater diversification, the UK market still offers some attractive attributes.

Private Assets (less liquid assets that are not publicly traded)

The UK commercial property market would also benefit from a more stable geopolitical environment, but the underlying picture remains constructive in most areas. Rental income is traditionally the main driver of returns, with 2026 total return forecasts now looking at around 5%. Overseas real estate and infrastructure exposures continue to be established in appropriate portfolios, with the expectation that they will provide additional diversified sources of returns over time.

Conclusion

Although we continue to see challenging headlines at times, the easing of Middle East tensions, lower oil prices, resilient global economic growth, and strong corporate earnings supported by continued investment in AI have all helped to restore confidence after the latest geopolitical issues.

Despite ongoing fiscal sustainability concerns and historically tight credit spreads, the overall valuation appeal of fixed income assets remains reasonable, and they provide good income and useful attributes in mixed asset portfolios. Equities continue to benefit from healthy corporate earnings, structural growth themes, and reasonable valuation attractions in most markets, although the exciting potential of AI will need to be delivered to justify valuations in that key area. 

Overall, we remain broadly constructive on the outlook for investment markets and their ability to offer superior longer-term returns compared to cash, while recognising that volatility is likely to remain a feature of the current environment. We will continue to manage risks through diversification across asset classes, sectors and geographies, and investors should stay focused on the longer-term attractions of remaining invested through any periods of short-term uncertainty.

Paul Glover
Chief Investment Manager
July 2026