May 2026 Market Commentary

April was, by any measure, a remarkable month for investors. Global stock markets posted their strongest monthly gains of the year — the MSCI All Country World Index returned 7.3% in sterling terms¹ — and in the United States, markets didn't just recover the losses suffered during the initial shock of the Middle East conflict: they set multiple new all-time highs. This while the Strait of Hormuz, through which roughly 20% of the world's seaborne oil and gas normally passes, remains effectively shut.

Most energy and geopolitical experts, asked at the start of the year what a prolonged closure would mean, would have predicted oil at US$200–250 per barrel, a shrinking world economy and retreating stock markets.² None of these things have come to pass — at least not yet. Understanding why tells us something important about how markets actually work.

The Saudis making more use of their east-west pipeline to the Red Sea has restored 5 million barrels a day of crude oil exports. The International Energy Agency co-ordinated the largest strategic oil reserve release in its history — 400 million barrels — and there has been a degree of demand destruction, notably across Asia, via behavioural changes. The result is that about half of the lost 20 million barrels a day of oil are getting back onto the market.²

As Quilter Cheviot's Investment Manager Jonathan Raymond notes, that still leaves 10 million barrels per day missing from global markets — equivalent to both the 1973 and 1979 oil crises combined, according to IEA executive director Fatih Birol.²

Marlborough's Chief Investment Officer Nathan Sweeney draws a compelling parallel: when a key supply route closes, the system doesn't stop — it adjusts to try to keep up with the pace of demand.³ He highlights the dramatic increase in empty supertankers heading towards the US as American producers capitalise on surging demand, while also pointing to an underappreciated new driver: the rapid growth of AI is creating a significant new source of energy demand, with fossil fuels generating around 60% of the electricity used by data centres that power AI systems.³

Strong numbers from Big Tech companies fuelled renewed enthusiasm for the artificial intelligence trade — Amazon, Meta, Microsoft and Alphabet all posted strong revenue and earnings growth on 29 April.¹ But the story goes much deeper than technology.

According to FactSet, as at 1 May 2026, 84% of S&P 500 companies that had reported Q1 results delivered a positive earnings surprise, and 81% a positive revenue surprise. The blended year-over-year earnings growth rate for Q1 2026 is estimated at 27.1% — the highest since Q4 2021.¹

Quilter Cheviot's Jonathan Raymond makes the crucial point: earnings upgrades have outstripped the rise in markets, meaning valuation multiples have actually become cheaper. The price-to-earnings multiple for the MSCI All Country World Index has fallen to 17.8 times from over 19 at the start of the year. Microsoft and Nvidia are now trading on lower multiples than the broader market, despite superior growth rates.² The same dynamic holds elsewhere: UK earnings growth is expected at 14% in 2026, the Eurozone at 15%, and emerging markets — boosted by TSMC, Samsung, Tencent and Alibaba — at 44%.²

The picture is not uniformly positive. UK consumer price inflation rose to 3.3% year-on-year in March, up from 3.0% in February. Eurozone CPI moved to 2.5% from 1.9%, and US CPI jumped to 3.3% from 2.4%.¹ More concerning still, the US producer price index posted its largest monthly increase since March 2022 in April, and is up 6.0% year-on-year — prompting Chicago Fed President Austan Goolsbee to declare the US has an "inflation problem".⁴

That inflation problem is now Kevin Warsh's, following his Senate confirmation as Federal Reserve Chair. Sustained higher inflation will make it harder for Warsh to deliver the rate cuts President Trump so craves.⁴ Rate cut expectations have been sharply reversed: before the conflict, the Bank of England had been expected to cut rates two or three times this year. Markets are now pricing two to three increases instead, and similarly for the ECB.¹

UK government bonds have been the pain trade of the period. The benchmark 10-year gilt yield climbed above 5% during May — a level last seen nearly two decades ago — and has added 70 basis points year to date.⁵

Evelyn Partners' Chief Investment Strategist Daniel Casali identifies multiple reinforcing pressures. The Bank of England is actively selling gilts into the market through quantitative tightening — in contrast to other major central banks that have paused or reversed this process — leaving UK gilts more exposed to excess supply.⁵ Oxford Economics forecasts UK GDP growth of just 0.6% in 2026, compared with 0.8% in the Eurozone and 1.9% in the US, raising concerns about debt sustainability when gross debt is almost equivalent to annual GDP.⁵

In its most adverse scenario, the Bank of England projects inflation could reach as high as 6% by the end of 2026 if energy prices remain elevated and second-round effects take hold through wages.⁵ Added to this, political uncertainty — with multiple candidates positioning for a potential Labour leadership contest — has weighed on sterling, which fell to US$1.33 during the week of 20 May.⁴ Casali's conclusion: favour shorter-dated gilts, which offer attractive income with greater resilience against fiscal and inflation uncertainty.⁵

Marlborough's Nathan Sweeney highlights an important theme gathering momentum: the US attracted $109 billion of private AI investment in 2024 versus just $9 billion in China, produced 40 notable AI models versus China's 15, and accounts for around 45% of global data centre electricity consumption.⁶

But Sweeney cautions against complacency. China produces more than double the science graduates and ten times the engineering graduates of the US each year, its economy is growing faster, and it is closing the gap in key areas — Chinese carmaker BYD recently unveiled a charger adding 400km of range in just five minutes, significantly faster than US equivalents.⁶ His view: this is unlikely to be a winner-takes-all story. Leadership rotates, dominance fades, and challengers adapt — which is one reason emerging markets exposure deserves serious attention in portfolios today.

This view is consistent with the strategy adopted by the OpesFidelio/Aisa investment committee, which at its April meeting confirmed a measured shift from growth to value within portfolios, increased exposure to established income-generating companies, and continued investment in long-term structural themes including the global energy transition — electrification, data infrastructure, defence, and decarbonisation.⁷

The apparent mystery of record stock markets amid a closed strait resolves itself when you look at the numbers clearly. As Quilter Cheviot's Jonathan Raymond puts it: transitory economic impact + earnings growth upgrades + cheaper valuations = stock markets at or close to all-time highs.² Stock markets are rising because that's what they typically do when earnings are growing strongly and valuations look cheap.

As Quilter Cheviot's Richard Carter concludes, staying invested, maintaining a long-term horizon, and holding portfolios diversified at asset class, sector and geographic levels is the better investment approach through time — even when short-term correlations behave unexpectedly.¹

Market volatility affects investors differently depending on where they are in their financial journey — and it is worth taking a moment to consider what the current environment means in practice.

If you are still working and have ten years or more before retirement, the picture is actually more encouraging than the headlines might suggest. Falling markets are, counterintuitively, good news for long-term accumulators: you are buying the same assets at lower prices, and every contribution you make today goes further than it did six months ago. This is the power of pound-cost averaging — by investing regularly through periods of volatility rather than waiting for calmer waters, you naturally buy more units when prices are low and fewer when they are high. Periods like this one are precisely when the foundations of future wealth are often built.

For those who are already in retirement and drawing an income from their portfolio, the calculus is different. If your portfolio has fallen in value and you are withdrawing money now, you are locking in those losses — selling assets at depressed prices that may recover in the months ahead. A portfolio with lower volatility is better suited to the decumulation phase. If you have any flexibility over the timing of withdrawals, it may be worth considering whether some can be deferred until markets have recovered a degree of stability. We are very happy to talk this through with you individually.

The direction of oil prices remains the single most important variable for markets. Any credible progress toward reopening the Strait of Hormuz — through formal peace talks, a durable ceasefire, or diplomatic back-channels — would likely trigger a sharp bond rally and a further leg higher in equities. Conversely, any escalation would quickly reverse the optimism that has carried markets to record levels.

In the UK, the political situation and Bank of England rate decisions through the summer deserve close attention. A prolonged Labour leadership contest raising fears of fiscal loosening could put further pressure on gilts and sterling. Q2 corporate earnings will also come into focus, giving us the first picture of how businesses are navigating persistently elevated energy costs.