The beginning of the second quarter then saw the fastest recovery on record for the S&P 500, with the index regaining its 9.1% Iranian crisis-related decline in just eleven trading days. The recovery was concentrated in US technology companies and beneficiaries of AI capital expenditure.

Financial markets largely looked through the fragile ceasefire, instead focusing on first-quarter S&P 500 earnings, which recorded one of the lowest earnings miss rates in two decades. This demonstrated remarkable corporate resilience despite one month of the reporting period overlapping with the crisis. Although performance was driven by the Magnificent Seven, it was encouraging that the remaining 493 S&P 500 companies also delivered earnings growth of 17.4%, the strongest since the fourth quarter of 2021. This supported both the S&P 500 and Nasdaq recording their strongest quarterly performances since 2020.

Despite this resilience, inflation concerns stemming from the energy shock led investors to increase expectations for interest rate rises rather than the cuts that had been anticipated at the beginning of 2026. Although both the US Federal Reserve and the Bank of England recently left interest rates unchanged, new Federal Reserve Chair Kevin Warsh surprised markets with more hawkish rhetoric than expected, reinforcing the Fed's commitment to controlling inflation rather than signalling imminent policy easing.

While inflation risks remain, several factors are helping to mitigate these concerns. Oil prices have fallen from their peak of around $120 per barrel to approximately $70, while the outlook for employment has softened. With oil prices already below the Monetary Policy Committee's most optimistic assumptions outlined at its 30 April meeting, and labour market conditions continuing to weaken, it is becoming increasingly difficult to envisage either the MPC or the Federal Reserve raising interest rates further this year. Instead, investor attention during the second half of 2026 may once again shift towards the prospect of interest rate cuts, as weaker labour market conditions, combined with the annualisation of recent energy price increases, help return inflation closer to central bank targets.

Following the ceasefire memorandum of understanding, including an initial 60-day peace agreement, investors are increasingly focusing on the Trump administration's efforts to avoid further military escalation, with Iran-related geopolitical risks gradually receding as negotiations progress. The decline in oil prices has also been supported by a temporary waiver authorising the sale of Iranian oil, while Persian Gulf exports have already recovered to approximately 80% of pre-war levels. A further significant development has been the UAE's decision to leave OPEC with effect from 1 May 2026, ending almost 60 years of membership. This represents one of the most important structural changes to global oil markets in recent years, given the UAE's substantial spare production capacity and its historic influence within the cartel.

Alongside lower oil prices, recent US inflation data have strengthened confidence that the renewed inflationary pressures concerning central banks are likely to prove temporary. This could provide a supportive backdrop for both equity and fixed income markets during the second half of the year.

Artificial intelligence has continued to underpin equity markets, with both private companies Anthropic and OpenAI taking official steps towards public listings and achieving funding round valuations approaching $1 trillion and $852 billion respectively. Meanwhile, SpaceX successfully floated at a valuation of approximately $2.2 trillion. Capital expenditure by the hyperscalers is now projected to reach around $730 billion during 2026, with these investments flowing directly into an extensive supply chain centred on semiconductor companies across the United States and emerging Asia. Looking ahead, investors will increasingly focus on whether productivity gains and ultimately returns on investment from AI can outweigh the substantial costs associated with developing foundation models and data centre infrastructure. Encouragingly, market leadership has continued to broaden, with the S&P 500 up 9.5% versus an average fall of 1.7% for the Magnificent Seven overall in the first half of the year.

The Euro Stoxx 50 generated a strong first-half return of 9.2%, particularly impressive given the index's limited exposure to technology companies. Financials continued to perform well, while industrial and capital goods companies also rallied. Fiscal policy remains a key support for the Eurozone, particularly in Germany, where relatively modest government debt of around 60% of GDP has provided scope for increased defence and infrastructure spending. Defence orders had already been rising before Middle East tensions intensified, with Germany planning a record fiscal deficit of 4.75% of GDP to support investment. More broadly, Eurozone fiscal spending is set to reach its highest level since the Global Financial Crisis, supported by EU funding and higher defence budgets, creating positive multiplier effects across the region.

Although political disappointment in the UK culminated in Sir Keir Starmer's resignation, the UK equity market continues to benefit from several supportive factors, including the FTSE 100's value bias towards banks, industrials, commodities and internationally diversified companies. Merger and acquisition activity has also continued at pace, with overseas buyers attracted by comparatively low UK valuations. We continue to believe both European and UK equity markets offer attractive diversification benefits alongside the technology and AI-driven growth opportunities available within US and emerging Asian equity markets.

The initial US dollar safe-haven rally during the Iranian crisis was relatively modest but strengthened towards the end of the second quarter following Kevin Warsh's hawkish comments. However, should inflation risks continue to moderate, interest rate expectations are likely to soften, increasing the probability of renewed US dollar weakness. We therefore continue to favour maintaining a meaningful sterling hedge against US dollar exposure. Such an environment would also be supportive for gold, which declined by 7.2% during the first half as easing geopolitical tensions, profit-taking and a stronger US dollar weighed on prices. Nevertheless, continued central bank purchases mean that gold retains an attractive long-term role as a hedge against fiscal sustainability, currency devaluation and geopolitical risks.

Fixed income did not provide its usual defensive characteristics during March's market volatility as inflation concerns pushed bond yields higher. However, the asset class recovered during the second quarter as the energy shock subsided and recent inflation data suggested that core inflation had not reaccelerated materially. With real yields now significantly more attractive than in recent years, fixed income once again offers attractive returns for long-term investors.

The first half of 2026 was characterised by renewed geopolitical tensions and macroeconomic volatility, with the Iranian crisis and resulting energy shock reintroducing inflation concerns and testing investor risk appetite. Nevertheless, global equity markets ultimately demonstrated impressive resilience, supported by robust corporate earnings and continued strength across the AI-related sectors. As oil prices have stabilised and inflation expectations have moderated, concerns over renewed monetary tightening have eased, allowing investors to refocus on underlying earnings growth and economic data rather than geopolitical headlines, providing a supportive backdrop for the second half of 2026.