June Market Update
Markets continue to climb despite an uncertain backdrop
Despite continued geopolitical tensions and renewed concerns about inflation, global equity markets have delivered another strong period for investors since the start of May. US markets reached fresh record highs, artificial intelligence remained the dominant investment theme, and company earnings continued to provide support for share prices.
The most significant development in recent days has been the renewed escalation between Israel and Iran. While financial markets have remained relatively resilient, investors are closely watching the impact on energy markets. Oil prices have moved sharply as markets assess the risk of disruption to supplies through the Strait of Hormuz, one of the world’s most important energy shipping routes.
Beneath the surface, markets are balancing two competing forces: resilient economic growth and corporate earnings on one side, and inflation and geopolitical uncertainty on the other.
What has surprised many investors is how well equity markets have performed against this backdrop. Once again, markets have demonstrated their ability to look beyond today’s headlines and focus on future earnings and long-term growth opportunities.
Equities remain the standout story
Equities have continued to be the strongest-performing asset class over the past six weeks. While there has been some day-to-day volatility, the overall trend has remained positive.
The US market continues to lead global returns, helped by strong corporate earnings, a resilient economy and ongoing enthusiasm for artificial intelligence. Investors remain willing to pay a premium for businesses that can demonstrate sustainable growth and clear competitive advantages.
Importantly, this is not simply a market being driven by optimism. Company earnings have generally remained robust, helping to justify higher share prices. Investors are still finding evidence that many businesses can grow profits despite higher interest rates and a more uncertain economic environment.
One of the most striking examples of investor appetite for innovation came this week with the stock market listing of SpaceX. The company completed the largest IPO in history, attracting enormous investor interest and highlighting the market’s continued willingness to back businesses viewed as leaders in long-term technological change. The event was significant not only because of its size, but because it demonstrated that investor enthusiasm for innovation remains exceptionally strong.
That said, expectations have risen significantly. After such a strong period for markets, investors may become more sensitive to disappointments, whether from company earnings, inflation data or geopolitical developments.
Artificial intelligence remains the dominant theme
Artificial intelligence continues to be one of the most important drivers of global equity markets.
What began as enthusiasm for a handful of large technology companies has broadened considerably. Investors are increasingly recognising opportunities across the wider AI ecosystem, including semiconductors, data centres, cloud computing, power infrastructure, industrial automation and software.
The scale of investment flowing into AI infrastructure remains substantial. Companies around the world continue to invest heavily in the technology needed to support the next generation of AI applications, creating opportunities across multiple industries.
This remains a powerful long-term growth theme, although investors are becoming more selective. Markets are increasingly focused on identifying which companies can translate AI investment into sustainable earnings growth rather than simply being associated with the theme.
One area worth watching is the growing concentration of market leadership within AI-related businesses. The theme continues to support earnings growth and investment, but expectations are also becoming higher, making markets potentially more sensitive to disappointment if growth slows.
The UK and international markets
The UK market has continued to play a different role from the US.
While it lacks the large technology companies that have driven much of the recent global rally, it remains home to many well-established businesses in sectors such as financial services, healthcare, consumer goods and energy. These companies can provide valuable diversification and, in many cases, attractive dividend income.
European markets have also made progress, although they remain more exposed to energy prices and slower economic growth than the US. Meanwhile, emerging markets continue to present a mixed picture. Countries with strong links to technology and semiconductor production have generally performed well, while others remain more vulnerable to higher energy costs and global economic uncertainty.
This highlights the importance of viewing international markets as a collection of individual opportunities rather than a single investment theme.
Bonds and interest rates
Bond markets have been somewhat more cautious than equity markets.
The key issue remains inflation. While inflation has fallen significantly from the peaks seen over the last few years, it has not disappeared entirely. Recent rises in energy prices have raised concerns that progress towards central bank inflation targets could become more difficult.
As a result, investors have become less certain about the pace of future interest-rate cuts.
Central banks, including the Federal Reserve and the Bank of England, have adopted a cautious approach. Policymakers remain encouraged by the improvement in inflation but are reluctant to declare victory too early, particularly while energy markets remain volatile.
For bond investors, this creates a mixed picture. Higher yields mean bonds now offer more attractive levels of income than they did for much of the previous decade. However, bond prices remain sensitive to changes in inflation expectations and interest-rate forecasts.
In broad terms, equity markets are focusing on growth and earnings, while bond markets continue to remind investors that inflation risks have not disappeared.
Oil and geopolitics remain key risks
The most important geopolitical issue for markets remains the ongoing conflict in the Middle East and its impact on energy markets.
Oil prices have been volatile throughout the period, reflecting concerns about supply disruptions and the security of key shipping routes. Energy prices matter because they influence much more than fuel costs. They affect transport, manufacturing, household budgets and inflation expectations across the global economy.
A sustained rise in oil prices could place renewed pressure on inflation and make central banks more cautious about reducing interest rates. Conversely, any easing in tensions could help improve the inflation outlook and support both bond and equity markets.
While geopolitical events are difficult to predict, they remain an important factor to monitor because of their potential impact on economic growth and inflation.
A resilient but fragile environment
The current investment environment remains both resilient and fragile.
It is resilient because company earnings, economic activity and investor confidence have held up better than many expected. Equity markets continue to be supported by long-term growth themes, particularly artificial intelligence, and by evidence that many businesses remain in good financial health.
At the same time, it is fragile because inflation, energy prices and geopolitical risks still have the potential to change the outlook quickly.
For long-term investors, the lesson remains the same. Markets rarely wait for uncertainty to disappear before moving higher. Some of the strongest periods of investment returns have occurred when economic and political news has felt least comfortable.
Rather than attempting to predict every market movement, a diversified investment approach remains the most sensible strategy. Maintaining exposure across different regions, sectors and asset classes helps ensure that portfolios are not overly dependent on any single theme or economic outcome.
While short-term uncertainty is likely to remain, the long-term drivers of investment returns – innovation, business growth and global economic development – continue to provide reasons for optimism.
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.