August Market Update

Resilient markets, changing risks

The past six weeks have given investors plenty to digest: political change in the UK, renewed conflict between the US and Iran, volatile oil prices, central banks sounding more cautious on inflation and a reassessment of some of the most popular AI-related investments.

Markets have proved remarkably resilient in the wake of changing risk. July was less comfortable with the S&P 500 falling around 1.4% In sterling terms, while Asia Pacific excluding Japan fell 3.7% and emerging markets 4.4%. The FTSE 100 was the notable exception, rising 3.6%. By mid-August, however, US markets had recovered to record highs. That contrast captures the current environment rather well: investors remain optimistic about economic growth and company profits, but are becoming more selective about what they are prepared to pay for them.

UK politics meets the bond market

Andy Burnham became Prime Minister in July, but for investors the more interesting development was the reaction of the bond market.

Despite the new government pledging to retain existing fiscal rules, gilt yields moved above 5% as investors reassessed the outlook for government borrowing, spending and inflation. It was a useful reminder that any government’s room for manoeuvre is partly determined by the price markets are willing to charge for lending to it. The next Budget will be watched closely for evidence of how the government intends to balance its spending ambitions with fiscal discipline.

Oil has put inflation back in the conversation

Renewed conflict between the US and Iran brought further disruption around the Strait of Hormuz and considerable volatility in oil markets. Prices moved sharply higher during July; retreated as hopes of an agreement improved; and then rose again in August.

For investors, the importance goes well beyond oil itself. Higher energy prices raise transport and production costs, which can feed into inflation and make central banks less willing to cut interest rates. That tension is already becoming apparent in monetary policy.

Interest rates: the conversation has changed

The Bank of England kept Bank Rate at 3.75% in July, but three of the nine members of the Monetary Policy Committee wanted to raise rates immediately to 4%. UK inflation has fallen to 2.6%, although the Bank expects it to rise again as higher energy prices work through the economy.

The Federal Reserve is facing a similar dilemma. It also left rates unchanged in July, at 3.5%–3.75%, with three policymakers voting for an increase. The ECB, meanwhile, held rates after raising them in June.

For much of the past couple of years, the question has been how quickly rates would fall. That can no longer be taken for granted. It does not necessarily signal another substantial cycle of rate rises, but central banks have clearly become more cautious.

AI: from enthusiasm to scrutiny

Artificial intelligence remains one of the dominant themes in markets, but the discussion has changed. The question is increasingly not whether companies will invest in AI; but how much they will spend; how that investment will be financed; and whether future profits justify the valuations being placed on it today.

Companies have already issued nearly $500 billion of AI-related debt in 2026, with the largest US technology companies accounting for around 40%. That helps explain why investors reacted sharply to some company results in July. Businesses perceived to be spending too aggressively were punished, while AI and semiconductor shares experienced significant falls across the US, Taiwan and South Korea.

None of this means the AI investment thesis is wrong. Today’s leading technology companies are highly profitable businesses with substantial cash flows. But even an exceptional business can be a poor investment if too much future success is already reflected in its price.

The return of the unloved UK market

One of July’s more interesting features was where investors found shelter. For years the UK stock market has been described as “unloved”, partly because it has relatively little exposure to the large technology companies that have driven US markets. In July, that became an advantage.

The FTSE 100 rose 3.6%, helped by its exposure to energy, financials and other more traditional sectors, while the S&P 500 fell around 1.4% in sterling terms. It does not make the UK inherently better than the US. It simply reinforces an important point: market leadership changes, often when investors least expect it.

A more fragmented world

There is also a broader theme beneath these shorter-term movements. Goldman Sachs estimates that increasing geopolitical fragmentation over the past decade has cumulatively reduced global GDP by around 1%, with a larger effect on emerging economies.

A geopolitical crisis can cause a sharp but relatively short-lived market shock. A sustained move towards competing political and economic blocs can have much longer-term consequences: less efficient trade, more complicated supply chains and greater spending on defence and energy security. These changes rarely produce a dramatic market event on any one day, but collectively they can influence economic growth and investment returns for many years.

What does it mean for investors?

Perhaps the most striking feature of the past six weeks is how much markets have absorbed. Political change, conflict in the Middle East, volatile oil prices, renewed inflation concerns and sharp moves in technology shares have not prevented major equity markets from remaining close to record highs.

Economic growth has remained relatively resilient, businesses remain profitable and investment is strong. At the same time, markets are demanding more evidence before rewarding ambitious promises, particularly where valuations are already high.

July also provided another reminder of the difficulty of reacting to recent performance. Technology shares fell sharply and then recovered, while the UK market - overlooked by many investors for years - became one of the month’s better performers. Which is why we continue to favour diversification, discipline and a long-term perspective over trying to predict the next market winner.

Disclaimer: Any information contained within this article is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity.

Journey accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.