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Executive Summary
Market review
Markets recovered as geopolitical fears eased. De-escalation in the US–Iran conflict and lower oil prices helped restore risk appetite after a volatile start to the quarter. AI remained a key market driver. Further increases in US hyperscalers’ spending plans reinforced confidence that demand for data centres, chips and related infrastructure remains a durable growth theme. Asian equities, such as in Korea and Taiwan were standout performers, supported by semiconductor demand. But expect more volatility with crowded positioning. Safe-haven assets were weaker. Commodities and precious metals declined as the geopolitical risk premium unwound and investors rotated back into equities and other risk assets.
Outlook: growth holds, risks persist
Growth remains resilient, but the path ahead may be less smooth. Consumer and business sentiment remain supportive, although sticky inflation and geopolitical risks could lead to periods of volatility.
Equities: Constructive, but increasingly selective. AI remains a powerful structural growth driver, but leadership may broaden from segments with crowded positioning. Fixed income: Corporate bonds continue to offer compelling yields, but tighter credit spreads (higher valuations) mean future returns will depend more on income and careful credit selection. Diversification remains essential: With stocks and bonds increasingly correlated, Alternatives can help to strengthen portfolio resilience.
Three tests for markets
Markets are never driven by just a handful of factors. That said, here are three tests for markets we are watching closely for 2H 2026:
Geopolitical risks: Lower oil prices and recovering Strait of Hormuz flows suggest the worst of the shock may be behind us, but the interim US–Iran truce remains fragile with negotiations still ongoing.
Earnings and AI must justify expectations: Continued spending on data centres, chips and power infrastructure is supporting growth, but upcoming earnings will test whether AI investment is translating into sufficient profits.
Interest-rates: Uncertainty on rate path is likely to keep markets on edge. Inflation remains above the Fed’s target, while reduced forward guidance means each data release (e.g. inflation, employment) could have an outsized impact.
Good income, but be selective
Income remains attractive, but investors are now receiving less additional yield for taking corporate credit risk, leaving less room for disappointment should growth weaken or volatility return. Prioritize quality and shorter duration: With interest-rate expectations still uncertain, we favour the 3–5 year segment of the bond market and higher-quality credit, which can provide attractive income with lower volatility. Broaden income sources: Select Investment Grade segments, including securitized credit, and Emerging-Market bonds can improve portfolio resilience. Alternative income sources such as Insurance-Linked Securities and Royalties can further improve portfolio diversification especially in periods of stress.
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