01 May 2026
In last month’s Outlook, we noted that with both stock and bond markets challenged in March by the escalating conflict in the Middle East, the important thing for investors is to understand how the conflict ultimately will affect the “real economy”.
Monthly Market Outlook
Monthly Market Outlook
In last month’s Outlook, we noted that with both stock and bond markets challenged in March by the escalating conflict in the Middle East, the important thing for investors is to understand how the conflict ultimately will affect the “real economy”. The impact on markets and investments will largely be a factor of the length and extent of the disruption to energy and commodity prices.
April marked an important shift in the geopolitical landscape and a significant change in investor expectations in this regard. After a sharp escalation in tensions between the US and Iran in March, recent weeks have seen a cautious but meaningful de‑escalation.
A ceasefire was agreed and later extended indefinitely, and while diplomatic negotiations remain fragile, it appears the most severe risks feared earlier in the year have eased significantly. In particular, the risk of prolonged disruption to global energy supplies through the Strait of Hormuz – or lasting damage to regional energy infrastructure – has been materially reduced, for now.
Why this matters for investors
History suggests that the biggest risks for long‑term investors do not originate from brief price spikes, but rather from sustained inflation and growth shocks that persist over several years. The easing of tensions lowers the likelihood of the latter scenario, which is an important and positive development.
That said, the conflict has not disappeared from markets altogether. Energy prices remain elevated compared to pre-conflict levels, and investors still expect central banks to remain cautious on interest rates through 2026. Government bond prices have recovered only modestly from their March declines, reflecting continued concern about inflation risks.
Equity markets recover (but geography is important)
Markets have responded much more positively in equities. Global stock markets rallied strongly in mid‑April and are now up by mid‑to‑high single digits over the month, with a number of markets remaining positive for the year so far.
However, the recovery has not been uniform across the globe. European and some Asian equity markets – seen as more exposed to Middle Eastern energy supply – have lagged, while US equities have held up notably better.
This reflects two factors: markets that are less dependent on Middle Eastern energy have proven more resilient, and sectors with strong earnings momentum, particularly those benefiting from investment in artificial intelligence (AI), have performed well.
Technology outperforming amid conflict
Nowhere has this resilience been more evident than in the technology sector, where US tech stocks were a major contributor to the April equity rally. See chart below.
What has driven this outperformance? Despite ongoing geopolitical uncertainty, expectations for US corporate earnings remain robust. Investment in AI continues at scale, spanning data centres, semiconductors and cloud infrastructure, with exceptionally strong demand in parts of the semiconductor industry.
Much of this progress has taken place away from the recent headlines, which have been dominated by geopolitics. Commercial investment in AI remains substantial, and in several areas demand continues to outstrip supply. This is increasingly being reflected in the earnings performance of companies supplying the core building blocks of AI technology.
The current US earnings season will be an important opportunity to assess whether companies are maintaining their investment plans, as well as how they are managing costs, pricing power and profit margins in a higher‑energy‑cost environment.
UK implications of the Middle East conflict
UK inflation and the cost of living
UK inflation is likely to rise in the near term, mainly due to higher energy prices. However, we expect the increase may be less severe than feared earlier in the year, and inflation is expected to ease back to target in 2027 as energy prices fall back and higher interest rates continue to restrain demand.
Bank of England interest rates
Financial markets currently expect the Bank of England to raise interest rates several times over the course of the year. This is a dramatic shift from expecting roughly two interest rate cuts for the year, prior to the start of the Middle East conflict.
Our view differs. We believe the Bank is more likely to adopt a “wait‑and‑see” approach, given weaker economic growth, a softer labour market and limited evidence of wage‑driven inflation.
While further rate rises cannot be ruled out if inflation proves more persistent, this is not our central expectation. If we are correct and the Bank doesn’t raise rates this year, rates will remain lower than markets expect, which would likely lead to good returns from UK government bonds (with their price rising as their yield falls).
What all of this means for long‑term investors
While geopolitical risks remain elevated, the outlook has improved significantly since March. Markets are adjusting to a world with ongoing uncertainty, but not one dominated by prolonged economic disruption.
This environment reinforces well‑established investment principles: diversification helps smooth periods of volatility, and the danger of reacting to negative short‑term headlines and risking locking in unnecessary losses.
We believe staying disciplined, well diversified, and focused on long‑term objectives remains the most effective way to navigate challenging market periods.
Disclaimer
Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.
If you have recently inherited a lump sum and are considering investing it, we can offer guidance.
The value of investments and any income from them can fall and you may get back less than you invested.
The value of investments and any income from them can fall and you may get back less than you invested.
