Investment Market Commentary - May 2026

Overview

The first part of 2026 was a story of two very different moods.  Markets began the year with confidence, supported by strong company earnings, easing inflation, and hopes interest rates would fall steadily throughout the year.

Global stock markets reached new highs in February, and investors were broadly optimistic about the outlook.

This positive momentum rescinded slightly in March as the conflict in the Middle East escalated – what initially appeared to be a short, targeted intervention has evolved into a prolonged and unpredictable confrontation.

The closure of the Strait of Hormuz – one of the world’s most important trade and energy routes – has added a new layer of consideration for global markets.

Against this backdrop, energy prices have risen sharply, inflation questions have resurfaced, and bond yields have climbed as investors reassessed the likelihood of interest rate cuts.  Stock markets movements are reacting to every new development in the conflict.

Inflation remains a central theme – higher oil and gas prices are putting pressure on households and businesses, and central banks are being cautious about easing monetary policy too quickly.

Positives remain despite the above headwinds, not all regions have struggled, and some markets have shown resilience.

Equities

UK

The UK economy has grown slowly over the quarter, with rising energy prices, falling real incomes, and subdued investment hampering growth.

Despite these challenges, the UK stock market has fared better than expected with growth mostly being supported by large global companies in sectors such as energy, financial, and consumer staples which generate significant revenue from overseas, which has supported domestic weakness.

Conversely, smaller / mid cap companies have struggled due to pressure on consumers and higher borrowing costs.

Whilst volatility remains elevated amid the Middle East conflict, UK equities still appear attractively valued relative to global peers.

US

The US economy has been resilient, largely due to its domestic energy production.

Although petrol prices have increased, this has been less severe than Europe and Asia which has supported consumer spending and business stability within the US economy.

A stronger US dollar, driven by investor demand for safety, has also bolstered domestic markets, and institutional capital has returned from overseas – the US AI dominance and the dollar’s reserve currency status has meant the US continues to attract global capital.

A prolonged Middle East conflict could eventually slow global growth and impact the US economy, but it remains resilient for now.

Europe

The Middle East conflict and disruption to energy supplies has been problematic for the European Economic area, due to Europe importing a higher proportion of oil and gas in comparison with other countries.  This has caused inflationary pressure that will hinder the European Central Bank’s ability to cut interest rates.

Monetary policy within the EEA is therefore in ‘wait and see’ mode, with several banks suggesting there may be interest rate increases this year.

A low growth / high inflation scenario would be the worst-case outcome for Europe and may push the fragile growth levels into recession.

Indeed, even if the Iran conflict ends in the near term, the outlook for European growth could be affected with projected levels well below the US at around 1% but improving as we move towards the latter part of 2026.

Asia & Emerging Markets

China has been supported by government efforts to shift savings away from property towards equities, and growth has been supported by IPO activity.  Government policy remains supportive, with authorities at times helping to stabilise markets.

Foreign investors continue to show interest in the China region partly due to strong industrial profits and global leadership in green manufacturing.  China’s growth target of 4.5%–5% still relies heavily on exports.

Emerging Markets continue to offer good growth opportunities despite lower growth, geopolitical tension, and tariff issues.

Many countries in the Emerging Markets region benefitted from the previous fall in the US dollar and increased trading opportunities with China and other countries seeking to reduce the impact of US tariffs.

India has however faced headwinds from inflation and currency weakness.

Latin America, particularly Brazil, performed well before retreating amid rising uncertainty.  However, Brazil and its currency have been well insulated in comparison with other emerging markets due to its energy exports, alongside exporting soft commodities and food.

Japan

Japan provided strong returns during the early part of 2026 with the Nikkei 225 surpassing 56,000 in February on the back of post-election optimism, a weak yen, robust earnings, and expectations of fiscal support.  By that point, the index had gained over 13% in local currency terms.

The yen’s weakness over the past year has largely supported Japan’s powerful export sector, especially manufacturers contributing to global AI-driven growth.

However, the Middle East conflict triggered a market pullback and further currency weakness, which has also been particularly challenging for a nation heavily reliant on imported energy.

Despite this, improved competitiveness from the weaker yen and ongoing reforms means Japan’s market retains significant rebound potential once geopolitical tensions ease.  Japan is therefore well positioned for when global conditions stabilise.

Bonds

Inflationary concerns have triggered a broad sell off as investors have anticipated delayed rate cuts and higher term premiums.

Monetary policy is also no longer aligned across major economies, which has added to volatility in the bond markets.

Against this backdrop, bond yields have risen sharply reducing capital values.  Many global government bond markets have reversed their early 2026 gains.

Short‑dated bonds have performed better than longer‑dated bonds, as their prices are less sensitive to changes in interest rate expectations.

Across the UK and Europe, credit spreads have compressed to near historic lows, offering limiting compensation for rising credit risk – valuations have appeared ‘one sided’ and remain vulnerable to widening should these risks materialise.

Corporate bonds have held up relatively well, supported by strong company balance sheets and steady demand from investors seeking income.

High‑yield bonds (higher risk bonds with higher interest payments) have delivered small positive returns, although investors are becoming more selective as economic risks increase.

Alternative Investments

Infrastructure has continued to provide a steady, defensive income, although energy price volatility remains a challenge.  Core sectors such as utilities, transport, and energy infrastructure have benefitted from stable, often inflation linked revenue streams, helping cushion investors in broader markets.

Gold prices fell unexpectedly as investors sold assets across the board, which has included some central banks to fund war and repay debt.

Agriculture commodities have been relatively subdued and will continue to be impacted by supply disruptions caused by the Middle East conflict.

Commercial property markets are showing early signs of stabilisation after 2 years of adjustment – rental growth remains strong in high quality sectors such as logistics, data centres, and modern office, although returns have continued to be driven by income rather than capital growth.

Overall, alternatives continue to offer significant diversification benefits as part of a wider portfolio.

Market Outlook

The biggest question for markets is how long the conflict in the Middle East will continue.

A prolonged disruption to energy supplies is likely to affect global growth, while any progress towards a peace deal could quickly stimulate growth with a sharp upturn, investors could see this as a future opportunity.

Trump’s political interests, namely the US mid-terms, and the longer lasting impact of high oil prices on voters, point towards a strong desire for an early unilateral declaration of victory.  The longer the conflict continues, the greater the chances of a negative supply shock impacting severely on company profits.

For medium to long‑term investors, the most sensible approach remains staying invested and avoiding attempts to time short‑term market movements.  Conviction is therefore key.

Diversification – across regions, sectors, and asset types – remains essential.

Whilst the current environment provides challenges, it also creates opportunities for patient investors.