Investment Viewpoint: mid-year outlook and looking towards H2

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Markets and macro insights with Bernard Swords, Chief Investment Officer

Key takeaways:

1. June was a quieter month for financial markets following a strong start to the year. Global equities were broadly unchanged while euro area bond markets continued to recover.
2. Easing tensions in the Middle East helped reduce pressure on energy markets, with oil and other commodity prices falling back, reducing inflationary pressure.
3. Economic conditions remain broadly encouraging. Economic growth in the United States continues to run above trend while activity in the euro area has shown encouraging signs of improvement.
4. Corporate earnings supported equity markets. Profit expectations have continued to improve across both the ‘new economy’ sectors and some key cyclical sectors.
5. While volatility is inevitable, the combination of stable economic growth, easing inflation and strong earnings provides a reasonably positive backdrop for investors as we move through the second half of 2026.

A review of how markets performed in June

• June marked a quieter period for financial markets following a strong start to the year.
• Global equities were broadly unchanged in local currency terms, although euro-based investors benefited from the stronger US dollar, which added over 1% to returns. Bond markets continued to recover, with euro area bonds gaining approximately 0.5% during the month.
• A key driver of market performance was continued progress towards easing tensions in the Middle East. As concerns around energy supply disruptions diminished, oil prices declined sharply. Brent crude oil has now fallen close to levels seen before the conflict escalated. Other commodity prices, including copper and several agricultural products, also moved lower, helping to reduce inflationary pressures.
• This has been one of the main drivers behind the recent improvement in euro area bond markets. While the European Central Bank raised interest rates by 0.25% during June, falling commodity prices and improving inflation dynamics have reduced expectations for further rate increases. Recent comments from ECB President Christine Lagarde also suggest a more patient approach to policy decisions going forward.
• The picture in the United States remains somewhat different. Inflation remains stubbornly above the Federal Reserve’s target, remaining close to 3%. Recent comments from Federal Reserve Chair Kevin Warsh have reinforced the view that controlling inflation remains the central bank’s primary objective. As a result, markets are now expecting up to three interest rate increases in the US over the next 12 months.

How have the sectors performed during June?

• Equity markets paused during June, but sector performance varied considerably. Commodity-related sectors such as energy and materials weakened as oil and other commodity prices declined. There was also some weakness within communication services, largely reflecting speculation surrounding equity raising activity involving major companies such as Alphabet and Meta, which weighed on investor sentiment towards the sector.
• Performance elsewhere was considerably stronger. Healthcare was the standout sector, rising almost 7% in euro terms during the month, while financials gained more than 5%.
• The fact that both a traditionally defensive sector such as healthcare and a cyclical sector such as financials performed well highlights the relatively balanced nature of market leadership during the period.

What does this mean for the economic outlook?

• The underlying economic backdrop remains encouraging.
• In the United States, economic growth continues to run modestly above long-term trend levels, supported by strong business investment and resilient consumer spending.
• A particularly positive development during June was the improvement in euro area economic conditions. The Purchasing Managers’ Index (PMI) recovered to the important 50 level, signalling stabilisation after an extended period of weakness. This improvement has been led primarily by improving activity in the services sector.
• Inflation trends have also become more favourable in Europe. While US inflation remains sticky, euro area inflation has continued to ease, with core inflation falling close to 2.4%.
• Looking ahead to the second half of the year, the outlook remains reasonably constructive. With a lasting resolution to tensions in the Middle East, the Strait of Hormuz remaining open and energy markets functioning normally further declines in energy prices are possible. This would provide an additional boost to economic activity across the major developed economies by lowering costs for households and businesses.
• In the United States, growth may moderate slightly as the support from previous fiscal measures begins to fade. However, continued investment in technology, infrastructure and business expansion, combined with potentially lower energy costs, should allow the economy to continue growing at or near its long-term trend rate.
• China remains a more challenging area, with domestic demand still relatively weak. However, policymakers may introduce additional support measures, and China’s export sector is already benefiting from improved global economic conditions, as evidenced by stronger trade volumes.

What impact have corporate earnings had on equity markets?

• Corporate earnings remain one of the strongest supports for equity markets.
• Profit expectations have continued to improve across a broad range of sectors and regions. The most significant upgrades have come from the so-called “new economy” sectors, including information technology, communication services and parts of consumer discretionary.
• However, earnings growth is not limited to these areas. Expectations have also improved across industrials and financials, reflecting the breadth of the current earnings recovery.
• Global profits are now expected to grow by close to 30% this year, more than double the level anticipated at the beginning of 2026.
• In our view, much of the strong equity market performance seen this year has been driven by improving corporate fundamentals rather than excessive optimism.

We continue to maintain a modest preference for risk assets

• The combination of improving economic activity, easing inflationary pressures and strong corporate earnings growth should continue to provide support for equities.
• Within equity markets, we continue to favour sectors associated with long-term structural growth, particularly technology-related businesses and companies benefiting from ongoing digitalisation and innovation trends. We also see attractive opportunities in selected industrial companies that are benefiting from long-term investment themes.
• At the same time, the economic cycle is becoming more mature and growth is unlikely to accelerate indefinitely. As a result, maintaining a balanced portfolio remains important, with exposure to both cyclical sectors that can benefit from economic growth and more defensive areas that can provide resilience should growth slow.
• Within fixed income, euro area bonds have recovered well in recent months. However, with much of the improvement in the outlook now reflected in prices, future returns may be more moderate than those seen recently.

Overall outlook

• The combination of resilient economic growth, easing inflation, lower commodity prices and strong corporate earnings continues to provide a reasonably positive backdrop for investors. While periods of volatility remain inevitable, the broader picture remains one of stability and gradual expansion rather than deterioration.

The week ahead: what to watch out for

Attention next week will focus on the minutes from the Federal Reserve’s most recent policy meeting, which may provide further insight into the outlook for US interest rates.

Investors will also be watching the latest ISM Non-Manufacturing survey for an update on activity across the US services sector.

In China, the latest inflation data will offer further evidence on the strength of domestic demand and the potential need for additional policy support.