July Market Update

June was another eventful month for markets. Investors had to digest falling oil prices, an easing of tensions in the Middle East, political uncertainty in the UK, central banks keeping interest rates on hold, and renewed scrutiny of the artificial intelligence theme that has driven much of the recent market optimism.

At headline level, markets remained resilient. Global equities were mixed, with Europe outperforming the US and Asia in local terms, while weakness in some of the largest technology companies weighed on major US benchmarks. Government bonds produced modest gains as yields fell in most major markets, although corporate bonds remained broadly resilient despite some widening in credit spreads.

The overall picture was one of continued confidence, but greater selectivity. Markets remained willing to reward growth, innovation and strong earnings, while becoming less forgiving where valuations are elevated or future returns are less certain.

Oil prices ease, but inflation remains relevant

One of the most significant developments in June was the fall in oil prices following the easing of tensions between the US and Iran and signs that disruption to energy flows through the Strait of Hormuz may be less severe than feared.

Lower oil prices are helpful for the global economy. They reduce pressure on transport, manufacturing and household energy costs, and make it easier for central banks to envisage inflation continuing to move in the right direction.

However, it remains too early to conclude that inflationary pressures have fully passed. Energy prices feed through the economy with a lag, and central banks remain alert to the risk that temporary price shocks become embedded in wages and business pricing decisions.

The Bank of England reflected this cautious approach in June. The Monetary Policy Committee voted to hold Bank Rate at 3.75%, noting that UK inflation had fallen but was expected to rise again later in the year as earlier energy price increases continued to pass through.

Central banks continue to walk a narrow path

Interest rates remain one of the key forces shaping markets. In the UK, the Bank of England is balancing weaker economic growth against inflation that remains above target. It is seeking to avoid keeping rates too high for too long, while also guarding against cutting too early and allowing inflation to become more persistent.

The US Federal Reserve faces a similar challenge. Inflation remains above target, while parts of the labour market are beginning to soften. The latest US employment data showed weaker job creation than expected, which markets initially welcomed because it reduced fears of further rate rises. However, the broader message was more nuanced: growth is slowing, but not collapsing.

This leaves central banks in a difficult position. Inflation is still above target, but labour markets are no longer as strong as they were. Policy decisions are therefore likely to remain finely balanced, and markets may continue to respond sensitively to inflation, wage and employment data.

AI remains the dominant theme, but scrutiny is increasing

Artificial intelligence continues to be the most important long-term investment theme in global markets. However, June showed that the AI story is becoming more complex. The early phase of the AI rally was largely driven by a relatively narrow group of large technology companies and semiconductor businesses. Investors were willing to pay high prices for companies seen as direct beneficiaries of AI demand. That enthusiasm has not disappeared, but it is becoming more selective.

In June, semiconductor shares remained volatile, while some of the largest technology companies came under pressure as investors questioned the scale of AI-related capital spending and when it would translate into sustainable profits. This marks an important shift. Market attention is moving beyond exposure to AI and towards the ability of companies to convert AI investment into durable earnings. The distinction matters - AI infrastructure build-out is vast and extends well beyond software. It includes semiconductors, data centres, electricity grids, energy supply, cooling systems, industrial automation and private market financing. AI is no longer solely a technology sector story; it is increasingly an infrastructure, energy and capital markets story. This creates opportunity, but also risk. Large-scale investment can support growth over many years, but high expectations leave markets more vulnerable to disappointment.

UK politics: focus remains on policy credibility

UK politics also moved back into focus in June after renewed pressure on the government and speculation about future leadership. Political headlines can feel unsettling, but markets tend to focus less on personalities and more on the credibility and direction of policy. The immediate reaction across sterling, gilts and UK equities was relatively muted, with investors focused on what any change in political direction might mean for fiscal policy, taxation, public spending and economic growth.

The UK remains in a difficult fiscal position. Any government faces pressure to support households and public services while maintaining market confidence in the public finances. That balance matters more for markets than the political drama itself. Political events can create short-term volatility, but they are rarely the only factor driving long-term market outcomes.

The second half of 2026: earnings will matter

As we move into July, attention is likely to turn back to company earnings. This is especially important in the US, where markets have been supported by strong profits and enthusiasm for AI-related growth. Company earnings have been a major driver of US equity market returns over the last year, making the upcoming second-quarter reporting season particularly important.

This is likely to be one of the key tests for markets in the months ahead. A significant amount of optimism has already been reflected in prices, especially around AI, technology and infrastructure. To continue moving higher, companies will need to demonstrate that earnings can support current valuations. This does not mean markets are necessarily overvalued or due a fall. It does mean expectations are higher. When expectations are elevated, even solid results may disappoint.

A resilient but more selective market

The investment environment remains broadly constructive, but more complex than it was earlier in the year. On the positive side, oil prices have fallen, inflation pressures may ease if energy markets remain stable, company earnings remain an important source of support, and long-term investment themes such as AI, infrastructure and automation continue to attract capital.

On the risk side, inflation is still above target, interest-rate expectations remain unsettled, geopolitical risks have not disappeared, and parts of the equity market remain highly dependent on a relatively narrow group of companies and themes. Markets rarely move in a straight line, and they rarely wait for the news to feel settled before recovering or advancing. In a market increasingly shaped by powerful long-term themes as well as shorter-term uncertainty, discipline, diversification and patience remain as important as ever.

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.