Q2 2026 Market Commentary: Global Economic and Investment Update

27th July 2026

Close up of blue flower
Introduction

The second quarter of 2026 saw markets recover strongly despite a backdrop of geopolitical uncertainty, inflation concerns and evolving central bank policy. Advances in AI-related technology, resilient corporate earnings and easing energy prices supported equity markets across most regions, while investors continued to navigate an environment shaped by shifting interest rate expectations and developments in the Middle East. As always, maintaining a diversified, long-term approach remains key in periods of changing market conditions.

Summary

UK: UK equities delivered positive returns, although they lagged many global markets as weaker energy prices weighed on performance. Inflation remained above target, interest rates were held, and political developments had little immediate impact on investor sentiment.

US: US markets recorded an exceptionally strong quarter, led by AI-related technology companies. Resilient corporate earnings and confidence around monetary policy continued to support investor optimism.

Europe: European equities rebounded strongly, supported by AI investment, robust corporate earnings and improving geopolitical sentiment. Financials benefited from higher interest rates, while energy lagged as oil prices fell.

APAC and EM: Asia Pacific and Emerging Markets were among the strongest-performing regions, driven primarily by semiconductor and AI-related technology stocks, while Japan continued its path towards higher interest rates.

Alternatives: Energy prices fell sharply as Middle East tensions eased, while listed infrastructure and renewables benefited from investment linked to energy security and growing AI-related power demand.

Sustainability: Sustainable investments outperformed broader global markets during the first half of the year, supported by easing inflation expectations, stronger technology performance and continued investment in electrification and infrastructure.

Performance: Portfolio performance was strong across the quarter, particularly within balanced and higher-risk models. Despite encouraging returns, geopolitical risks and uncertainty around inflation and interest rates reinforce the importance of diversification and maintaining a long-term perspective.

Close up of small yellow and black British bird
UK

UK equities gained in the second quarter of the year, albeit lagging most major markets. The large relative weight of the energy sector proved a drag on performance, as crude oil prices fell from their early peak to finish over 30% down on the quarter. UK inflation held at 2.8% year-on-year to end of May, 1 remaining above the 2% target of the Bank of England, which voted to hold interest rates at 3.75% throughout. The FTSE 100 was beaten handsomely by the small-mid cap FTSE 250, returning 4.04% and 9.81% respectively. 2

Sir Keir Starmer announced his resignation from the Labour Party leadership and premiership late in June, after weeks of mounting pressure and resignations from cabinet ministers. Andy Burnham has taken on the role after no challengers emerged. Markets seem unfazed by the change, as investors wait to see more indication of Burnham’s likely policy trajectory.

The 10-year gilt yield rose to its highest level since 2008 in April on growing inflationary concerns, spurred by rising energy prices and domestic political uncertainty. 3 Despite this, receding oil and gas prices led a resurgence, with the iBoxx Sterling Gilts 10+ Year index returning 2.44% over the quarter. 4 The iBoxx Sterling Non-Gilts index returned 2.64%. 5

A couple in the kitchen discussing general topics
US

The US market enjoyed its best quarter since the 2020 Q2 COVID-rebound, buoyed by investor optimism on AI infrastructure and in spite of the ongoing Middle East conflict and inflation concerns. The technology sector was, as has so often been the case in recent times, the standout, with the tech-heavy Nasdaq 100 rising 27.74% in USD terms. 6  The S&P 500 returned a respectable 15.1% (USD) 7>, being more exposed to the laggard sectors of energy, utilities and consumer staples. Corporate earnings resilience continued, maintaining investor confidence in the market’s ability to continue its upward trajectory. 8 Measured signalling from the Federal Reserve upon the appointment of new Chair, Kevin Warsh, left investors less concerned over potentially restrictive monetary policy in the coming months. 9 Despite this, expect eyes to remain on key economic data for any signs of weakness or excess inflationary pressure going forward.

US investment grade corporate bonds delivered positive returns on strong corporate fundamentals, while Treasuries were largely flat.

Close up of leaves covered in water droplets
Europe

European equities posted strong returns in Q2, bouncing back from a poor first quarter, on renewed optimism around AI infrastructure investment, strong corporate earnings and work towards a peace deal in Iran. 10 Financials were also buoyed by the European Central Bank hiking interest rates, out of step with the Bank of England and Federal Reserve. The energy sector suffered from falling oil and gas benchmarks. The market delivered its best returns in 5 years, with the Euro STOXX 50 returning 14.09% for the Sterling investor. 11

Eurozone inflation rose from 3.0% year-on-year in April to 3.2% in May, before falling back to 2.7% in June, 12 while the economy shrank by 0.2% in Q1. 13 Investment grade corporate bonds, as in the US, outperformed government bonds over the period, driven by strong corporate fundamentals, while government bonds rose despite the central bank’s rate hike. 14

Macro close up of a bumble bee collecting pollen from a purple flower
APAC and EM

Asia Pacific Ex-Japan and Emerging Markets were the strongest performing major equity regions with returns in Q2 of 27.8% and 24.2% respectively in USD terms. 15 Much of this performance was concentrated within AI-related technology and semiconductor stocks, which has been the theme for much of the year so far. MSCI Korea ended the quarter 87.6% up in USD terms, driven by names such as Samsung and SK Hynix. The latter, which is due to start trading on the Nasdaq at the time of writing, will be the largest ever listing by a foreign firm in the US. 16

As expected, the Bank of Japan raised interest rates to 1%, marking the highest level they have been in over 30 years. While the country’s central bank is looking to ‘normalise’ rates after being at near zero for a prolonged period of time, the war in the Middle East and high energy prices have fuelled inflationary pressures in the region. Japan, like many other neighbouring countries, depend heavily on oil and gas from the Middle East. Despite this, the TOPIX delivered returns of 14.4% in local currency terms. 17

A couple in their late 60's hiking through the forrest
Alternatives

Oil and Gas fell sharply in Q2 after spiking earlier in the year, as the US and Iran agreed to a temporary ceasefire, despite traffic through the Strait of Hormuz remaining at a fraction of pre-war levels. 18 Brent Crude fell over 30% during the quarter, 19 though remained elevated above pre-war prices. Precious metals continued to suffer on inflation and interest rate expectations, due to offering no yield compared to that offered by currencies and fixed income. 20 Listed infrastructure performed well on inflows into power generation and digital assets, fuelled by the AI boom, while renewables were boosted by a renewed focus on energy security amid oil and gas shortages and AI power demand. 21

A macro close up of a burning flower
Sustainability

Q2 brought a strong finish to the first half of 2026 for sustainable investing. The MSCI All Country World Index lagged its Socially Responsible equivalent in H1, returning 12.7% vs. 17.30% in Sterling terms. 22 Much of this was down to weakening oil prices over Q2 due to the de-escalation in the Middle East, and continued rallies in mega-cap technology companies. While this shorter-term performance does not point to any sustained trend, it may suggest that some of the headwinds experienced in previous years are appearing to abate. The easing of inflation and interest rate expectations (vs. the peaks we saw in 2022 and 2024 respectively), relative valuations looking more appealing than during the ESG boom, and growing investment in electrification, grid infrastructure, etc, have all aided performance.

Looking at climate-related news, June saw fiery temperatures across much of Europe, with several records being broken. Provisional statistics show that June 2026 was England’s warmest June on record for average mean temperature, while the UK and Wales recorded their second warmest June in a series dating back to 1884. These figures were supported by exceptionally warm overnight temperatures. 23 A record-breaking daytime temperature was also seen in England, with a provisional high of 37.7°C recorded on the 26th June, surpassing the previous record of 35.6°C set in June 1976. 24

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Performance

While June was relatively flat, all models performed very strongly across the quarter, with balanced and above risk models hitting double-digit returns over the period. As mentioned, it was a positive quarter (and year-to-date) for sustainable investments, with these models showing stronger performance vs. their conventional counterparts.

While this performance is encouraging, and supports the changes we made in January, we do remain cautious about current conditions. While we saw signs of de-escalation, the ongoing conflict in the Middle East still poses a problem, creating uncertainty around energy prices, inflation, and central bank interest rate paths. This complicated backdrop once again highlights the need for diversification and cool heads.

1 https://www.ons.gov.uk
2 Morningstar Direct – FTSE 100 TR GBP, FTSE 250 TR GBP
3 https://www.bloomberg.com/news/articles/2026-04-14/uk-sovereign-sets-bond-demand-record-as-yield-hunters-pile-in
4 Morningstar Direct – Markit Iboxx GBP Gilts 10+ TR
5 Morningstar Direct – Markit Iboxx GBP NonGilts TR
6 Morningstar Direct – Nasdaq 100 TR USD
7 Morningstar Direct – S&P 500 NR USD (Total Return)
8 https://www.schroders.com/en-gb/uk/individual/insights/quarterly-markets-review—q2-2026/
9 https://www.reuters.com/business/view-fed-holds-steady-warshs-debut-analysts-see-hawkish-shift-2026-06-17/?utm_source=chatgpt.com
10 https://www.schroders.com/en-gb/uk/individual/insights/quarterly-markets-review—q2-2026/
11 Morningstar Direct – EURO STOXX 50 GR EUR (GBP)
12 https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-01072026-ap
13 https://ec.europa.eu/eurostat/en/web/products-euro-indicators/w/2-05062026-ap
14 https://www.schroders.com/en-gb/uk/individual/insights/quarterly-markets-review—q2-2026/
15 Morningstar MSCI APAC Ex-Japan & MSCI EM TR 01/04/2026 – 30/06/2026
16 https://www.bbc.co.uk/news/articles/c4gym70r0y4o
17 Morningstar TOPIX JPY 01/04/2026 – 30/06/2026
18 https://hormuzstraitmonitor.com/
19 https://www.hl.co.uk/shares/trading-commodities/brent-crude-oil
20 https://www.schroders.com/en-gb/uk/individual/insights/quarterly-markets-review—q2-2026/
21 https://www.cbreim.com/insights/articles/infrastructure-quarterly-q2-2026
22 Morningstar MSCI ACWI SRI and MSCI ACWI TR GBP 01/01/2026 – 30/06/2026
23 https://www.metoffice.gov.uk/about-us/news-and-media/media-centre/weather-and-climate-news/2026/englands-warmest-june-on-record–the-second-warmest-for-the-uk-and-wales-
24 https://www.metoffice.gov.uk/blog/2026/june-2026-heatwave-a-recap-of-the-temperature-records