Published: 01/07/2026 By Oliver O'Brien
Executive SummaryThe second quarter of 2026 was a positive period for markets, particularly equities. Investor sentiment improved as tensions in the Middle East eased, oil prices fell back from their April highs, and markets refocused on areas linked to artificial intelligence, semiconductors and technology infrastructure.
Developed market equities returned 13.9% over the quarter, while emerging market equities rose 24.0%. This was a notable improvement from Q1, when developed market equities fell 3.5%, emerging market equities were broadly flat at -0.1%, and commodities rose 24.4% as energy prices increased sharply.
Fixed income markets were more subdued. The Bloomberg Global Aggregate Index returned 0.9% in Q2, helped by improving sentiment in corporate bond markets, but held back by continued uncertainty around inflation and interest rates.
Overall, Q2 was a stronger quarter than Q1, although markets remain sensitive to inflation data, central bank decisions and geopolitical developments.
Equities
Equity markets recovered strongly during the quarter. The strongest returns came from companies and regions linked to artificial intelligence and semiconductor supply chains. Emerging markets were particularly strong, helped by exposure to Asian technology businesses.
Asia ex-Japan was the best-performing major region, returning 28%. Korea and Taiwan were especially strong, returning 88% and 49% respectively, reflecting investor demand for semiconductor and electrical equipment companies.
UK equities also delivered positive returns, but lagged other major markets. The FTSE All-Share returned 4.7% in Q2. This partly reflects the UK market’s lower exposure to technology and greater exposure to sectors such as energy and mining, which were less favoured as oil prices fell.
European equities performed well, with the MSCI Europe ex-UK Index rising 14.4% over the quarter.
Fixed income
Fixed income markets were steadier than in Q1, but returns were modest. The Bloomberg Global Aggregate Index rose 0.9% in Q2, supported by tighter corporate bond spreads and improved investor confidence.
Government bonds remained sensitive to inflation and interest rate expectations. In Q1, higher energy prices had caused bond markets to weaken as investors reassessed the likely path of central bank policy. Falling oil prices in Q2 helped ease some of these concerns, but central banks remained cautious.
Bonds continue to provide income and diversification within portfolios, but the period was a reminder that fixed income is not risk-free, particularly when inflation expectations are moving.
Interest rates, inflation and economic data
UK inflation remained above the Bank of England’s 2% target but was stable. CPI inflation was 2.8% in the 12 months to May 2026, unchanged from April, while CPIH inflation was 3%.
The Bank of England held Bank Rate at 3.75% in June. The Monetary Policy Committee voted 7–2 to keep rates unchanged, although two members voted to increase Bank Rate to 4%, showing that inflation concerns remain.
The UK economy grew by 0.6% in Q1 2026, following revised growth of 0.2% in Q4 2025. The services sector was the main contributor, growing by 0.8%.
In the US, the Federal Reserve held its target range for interest rates at 3.50% to 3.75% in June. The Fed noted that economic activity remained solid, but inflation was still above its 2% target.
In Europe, the European Central Bank raised its three key interest rates by 0.25% in June, taking the deposit facility rate to 2.25%, the main refinancing rate to 2.40%, and the marginal lending facility to 2.65%.
What the future looks like
The outlook is reasonable, but still uncertain. Lower oil prices and reduced geopolitical tension helped markets during Q2, but inflation remains above target in several economies and central banks are likely to remain cautious.
For long-term investors, the main point remains the same: short-term market movements are normal. Holding a diversified portfolio, aligned to objectives, time horizon and attitude to risk, remains the most sensible approach.
This commentary is for general information only and should not be treated as personal financial advice. Past performance is not a reliable guide to future returns.