Introduction
This commentary covers market developments during Q2 2026 (April-June). Investor sentiment was dominated by the Middle East conflict and a renewed optimism around artificial intelligence (AI). Global markets recorded gains in Q2, with notably strong performance from Asian and Emerging Markets. Geopolitical tensions in the Middle East caused periods of volatility, but sentiment was boosted by the announcement of a memorandum of understanding that was hoped will lead to a US-Iran ceasefire, easing concerns over a broader regional conflict and leading to a decline in the oil price. A key driver of market performance was further momentum in AI and the significant capital investment being made, which supported markets and economies heavily exposed to this theme.
From an economic point of view, the Bank of England maintained its interest rate at 3.75%, although two policymakers preferred a 0.25% increase at the June meeting. UK inflation fell further to 2.8%, although it remained above its 2% target. UK economic growth of 0.6% in Q1 was stronger than expected, with the service sector the main driver. Following poor local election results in May that placed further pressure on UK Prime Minister Keir Starmer, he announced his resignation after a by-election victory for rival Andy Burnham, who became PM in July. The US Federal Reserve kept its interest rate on hold at 3.5%-3.75%, whilst new Chair Kevin Warsh removed language that previously suggested a bias towards future cuts. However, the European Central Bank raised its interest rate by 0.25% to 2.25% amid increased inflationary pressure from higher energy prices.
Market Performance
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK Equities
UK equities rose in Q2, with the mid cap FTSE 250 strongly outperforming the large cap FTSE 100. Declines in the heavyweight energy sector capped performance of the FTSE 100, as the lower oil price weighed on these stocks. There was better performance from the consumer discretionary, real estate and financials sectors, with the first two also boosting performance of the FTSE 250. The more domestically-focussed FTSE 250 also benefited from its lower allocation to commodities, whilst optimism over UK growth supported other economically-sensitive sectors, such as housebuilders and leisure.
Global Equities
The US S&P 500 (which measures 500 of the largest US companies) produced a robust double-digit gain in Q2, its strongest quarterly rise since 2020. Performance was driven by positive corporate earnings updates, continued enthusiasm for AI-related stocks and greater optimism over the economic outlook. The FTSE World Europe ex UK Index (which measures large and mid cap stocks across Europe) also posted a strong positive return, with information technology shares performing well amid robust earnings updates and optimism over the AI outlook. Financials also performed well, whilst the energy sector declined amid the fall in the oil price. The Japanese Nikkei 225 Index (a measure of Japan’s top 225 companies) recorded an extremely strong gain of over 37%, supported by the easing Middle East tensions and outperformance by AI and semiconductor-related stocks. Weakness in the yen also supported exporters.
Asia and Global Emerging Markets Equities
Q2 saw outperformance by Asian and Global Emerging Markets over developed markets. Both the MSCI Asia ex Japan Index (which captures the performance of over 1,000 companies across Asia) and the MSCI Emerging Markets Index (which covers over 1,200 stocks from across 24 emerging markets countries) recorded very strong gains, driven by robust performance from a narrow range of memory and semiconductor stocks that are benefitting from continued AI demand. Korea was the strongest performing regional market, followed by Taiwan, due to their central role in the global AI supply chain. China was among the underperformers amid mixed economic data, whilst India also lagged due to concerns over the impact of AI on its IT services sector. Brazil was also a notable underperformer versus the broader emerging markets index, with politics weighing on sentiment.
Fixed Income
Government bonds provided a small positive return in Q2, despite periods of volatility. The Middle East conflict was a key driver, with bond yields tracking energy markets. Earlier in the quarter, yields rose amid fears over an escalation in the conflict, but subsequently fell on signs of a potential peace agreement. There was some divergence in the performance of global government bond markets with underperformance from the US and Japan. The FTSE Actuaries UK Conventional Gilts Index was influenced by both the global concerns and domestic politics. At the start of the period, the 10-year gilt yield reached its highest level since 2008, reflecting inflationary pressures from higher energy prices as well as concerns over the fiscal outlook ahead of local elections. However, the avoidance of a drawn-out leadership campaign to replace Keir Starmer supported sentiment, as did the Bank of England stating that easier labour market conditions and weaker economic growth should help contain underlying inflationary pressures.
AFP306 exp7/27
Market Commentary – Quarter 1, 2026