May Market Update

The global backdrop remains unsettled. Conflict in the Middle East has kept energy markets volatile, with disruption around the Strait of Hormuz feeding into oil prices, transport costs and inflation expectations. The IMF has described the global economy as operating “in the shadow” of renewed geopolitical disruption, with rising commodity prices and tighter financial conditions testing recent resilience. Its central forecast is still for global growth to continue, but at a more subdued pace: 3.1% in 2026 and 3.2% in 2027.

What makes the current period interesting is that equity markets have performed exceptionally well despite this backdrop. In the US, the S&P 500 and Nasdaq reached record highs in early May. The story is therefore not one of markets ignoring risk, but of investors deciding that company earnings, economic resilience and the artificial intelligence investment theme are currently strong enough to outweigh the geopolitical concerns.

Equities: the standout story

Equities have been the clear focus of markets over the past month. April saw a strong return of risk appetite, with global shares rallying even as the geopolitical news remained uncomfortable. Technology, semiconductors and AI-related companies led the recovery, and several major equity markets reached fresh highs. Markets appeared to look through the considerable geopolitical turbulence, helped by renewed enthusiasm for artificial intelligence.

This matters because it shows how forward-looking markets can be. Investors are not waiting for the news to feel comfortable. Instead, they are assessing whether company profits, cashflows and future growth prospects remain strong enough to justify higher share prices. For now, the answer has been yes.

The US still leads global equity markets

The US remains the main driver of global equity returns. This is partly because of the size and quality of its largest companies, but also because the US market has the highest concentration of AI businesses.

The S&P 500 and Nasdaq both reached record highs on 8th May, helped by stronger economic data and continued enthusiasm for technology and semiconductor stocks. Year to date, the S&P 500 was up 8.1% and the Nasdaq was up 12.9%.

The US labour market has also remained resilient. April payrolls rose and unemployment was unchanged at 4.3%, giving investors some confidence that the economy is still growing; although it also means the Federal Reserve has less urgency to cut interest rates quickly.

AI remains the dominant market theme

Artificial intelligence continues to dominate the equity market narrative. This is no longer just about a handful of large technology companies. Investors are increasingly looking across the wider AI supply chain, including semiconductors, data centres, cloud infrastructure, electricity demand, cooling systems, industrial automation and the metals needed to support that build-out.

This has helped broaden the opportunity set, but market leadership is still concentrated. That is worth noting. Strong momentum can continue for longer than expected, but valuations in the most popular parts of the market are now more demanding. The companies leading the market may well be excellent businesses, but investors are already paying a high price for that quality and future growth.

UK equities: steadier, more income-focused

The UK market has not had the same excitement as the US, largely because it has less exposure to large technology and AI-related companies. Instead, the UK market remains more heavily weighted towards financials, energy, healthcare, consumer staples and dividend-paying businesses.

That can make the UK feel less dynamic during a technology-led rally, but it also gives it a different role in portfolios. UK equities can provide income, value exposure and diversification away from the more growth-heavy US market.

For UK-based clients holding globally diversified portfolios, currency also matters. A large part of global equity exposure is usually denominated in US dollars, so sterling-dollar movements can affect returns when translated back into pounds.

Europe and emerging markets: not one simple story

Europe remains more exposed to energy-price disruption than the US, because it is more dependent on imported energy. That said, Europe is not in the same position it was during the 2022 energy crisis. Gas storage, lower industrial energy intensity and a more prepared policy response have helped reduce the immediate vulnerability.

Emerging markets have been strong, but the picture is mixed. North Asian markets such as Taiwan and South Korea have benefited from their role in the semiconductor and AI supply chain. Other emerging economies are more exposed to higher energy prices, food costs, currency pressure and global financing conditions; for which reason emerging markets should not be viewed as a single block. The drivers of returns in Taiwan, South Korea, India, Brazil and China can be very different.

Bonds: sending a more cautious signal

Bond markets have been more cautious than equity markets. This is one of the most important features of the current environment. Equities have focused on earnings resilience and long-term growth themes. Bonds have focused more on inflation risk. Higher oil prices can push inflation higher, which makes central banks less willing to cut interest rates. That matters because bond prices are highly sensitive to changes in interest-rate expectations.

In broad terms, equity markets are focusing on resilient company profits, while bond markets are reminding us that inflation risk has not disappeared.

Central banks are not ready to declare victory

Central banks remain cautious. The US Federal Reserve held interest rates at 3.50%–3.75% at the end of April, noting that economic activity was still expanding but inflation remained elevated, partly because of higher global energy prices. The Bank of England also held Bank Rate at 3.75%. The Bank specifically noted that the conflict in the Middle East had made the outlook for global energy prices highly uncertain.

This is a shift from the mood earlier in the year, when investors were more focused on when rate cuts might arrive. The debate is now more balanced. If inflation remains sticky, rates may stay higher for longer. If energy prices ease and growth slows, central banks may have more room to cut.

Oil is the key risk to watch

Commodities are not the main driver of Journey portfolios, but they are very important for the economic outlook.

Oil is the key commodity because it affects almost everything: petrol prices, transport costs, household energy bills, business margins and inflation expectations. The World Bank expects energy prices to rise sharply this year - projecting a 24% increase in energy prices in 2026 as the Middle East conflict disrupts global commodity markets.

Gold has also remained supported by geopolitical uncertainty and demand for perceived safe-haven assets. Industrial metals have benefited from a different force: demand linked to AI, data centres, electrification and infrastructure.

The current environment remains resilient but fragile

It is resilient because equity markets, company earnings and the US economy have coped better than many expected. It is fragile because inflation, energy prices and geopolitics could still change the outlook quickly.

The strongest areas of the market have been those with clear earnings support and exposure to long-term structural growth themes, particularly technology and AI. However, after such strong gains, expectations are higher. That means markets may be more sensitive to disappointment, whether from earnings, inflation data, interest-rate expectations or geopolitical headlines.

For long-term investors, the lesson is not to try to predict every market move. April was a useful reminder that markets often recover before the news feels comfortable. Selling during periods of uncertainty can mean missing the recovery that follows.

A diversified approach remains the most sensible way to navigate this environment. That means holding exposure across regions, sectors, asset classes, currencies and investment styles, rather than relying too heavily on any single theme or economic outcome.

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.