Shorter-term market outlook: Q2 2026

Though we manage funds for the long term, here are our thoughts on markets as we look forward over the coming quarters.

After another strong run during the second quarter, we believe equities are relatively fully valued. Though equity market volatility reduced somewhat after its spike in the first quarter, we believe short-term volatility is likely to remain an ongoing feature of equity markets during the coming quarters given elevated valuations, market concentration, and the potential for geopolitical or monetary policy uncertainty to recur. In our view, it is important to have a spread of geographical equity market exposure, while continuing to monitor risks.

In fixed income, inflation risk has waned somewhat in June as energy prices retreated, which could provide support for government bonds in the short term. We believe in holding a diversified blend of government bonds and credit, in different geographies and with different characteristics, and which can continue to provide income-generation benefits.

Although UK equities rose, the market trailed the rise in global equities during the second quarter, as the UK’s lack of growth-related stocks held it back. Therefore, the UK remains relatively attractive on valuation grounds. The broad international revenue exposures of leading UK-listed companies, relatively high dividend yields and its diversification benefits, given its distinct sector composition, add to its current attractions, in our view.

Relatively elevated US valuations have expanded further, and market leadership has remained concentrated in growth-related sectors. Sentiment around the AI capital expenditure build cycle will remain a dominant focus in the coming quarters. Further out, we believe diversification into other regions may prove beneficial as US returns could wane over the longer term.

The European Central Bank has started raising interest rates given inflation worries. Though valuations are relatively attractive, the continent’s equity-sector exposure to geopolitical risk and its lacklustre shorter- and longer-term economic growth prospects detract from the investment case.

Sentiment around the AI capital expenditure build cycle will remain a dominant focus in the coming quarters.”

Japan’s stocks have benefited from positivity around politics and longer-term structural reforms, and exporters have been given a boost by yen weakness. Japan is supported by near-term earnings strength and its distinct economic, policy and market drivers. However, valuation levels are relatively full, and longer-term growth prospects are less compelling.

Valuations remain relatively attractive in our view, though certain country-level markets have perhaps overextended in recent months. However, longer-term economic growth potential, demographic and structural tailwinds make emerging markets one of the more attractive regions further out.

The spike in energy prices on the back of the conflict in the Middle East has dissipated and inflation risks have lessened. In turn, expectations for the number of near-term interest rate hikes in the US and UK reduced during June in particular. Real yields are supportive of the asset class in our view. Overall, within the asset class, we prefer longer-term government bonds, and on a regional basis, we favour UK gilts, with a reduced exposure to global government bonds. Over the longer term, a skew away from government bonds and towards credit is likely to prove beneficial in our view.

We believe in holding a diversified blend of government bonds and credit.”

Credit spreads have tightened further in both high yield and investment grade bond markets, potentially limiting near-term potential. Volatility could open opportunities over the coming months, particularly in high yield. Further out, we think investment grade and high yield corporate bonds will likely outperform government debt, and sterling corporate bonds could outperform global peers.

Over the past few years, several emerging economies have benefited from fiscal pragmatism, but we continue to monitor for idiosyncratic risk on an ongoing basis. Longer term, the asset class is supported by structural growth. We prefer broad exposure to both hard and local currency emerging market debt.