The first half of 2026 has again demonstrated how quickly the investment landscape can change, with markets moving sharply in response to geopolitical developments rather than a gradual shift in company earnings or economic data. The escalation of conflict involving Iran has been the dominant catalyst, creating a renewed shock to global energy markets and a period of heightened volatility across equities, bonds, real assets and currencies.
The centre of this most recent bout of volatility has been the oil price. Disruption to energy infrastructure, together with restrictions on shipping through the Strait of Hormuz, pushed prices sharply higher and stoked concerns that inflation could once again become the main risk facing investors. More recently, negotiations and announcements around a potential agreement and the reopening of supply routes have provided some relief, with oil prices falling back as shipping through the Strait of Hormuz has resumed. However, this should not be mistaken for a complete resolution. The current agreement appears to be the start of a negotiation process, rather than the end of one, and markets will continue to respond to evidence of genuine de-escalation rather than to headlines alone.
Investors’ concern about inflation are valid, and memories of the resulting painful market environment experienced in 2022/23 are all too fresh. However, it is also important to consider the causes of inflation which are different today than they were 4years ago. In 2022, inflation was driven largely by the release of pent-up demand, substantial government support and a very low interest rate environment. Consumers and businesses had money to spend, borrowing was cheap, and supply chains were still struggling to cope with the sudden reopening of the global economy following the pandemic. That was what economists would refer to as a demand side shock.
The position today is different. Demand is not especially strong across most developed economies, and the interest rate rises of 2022 and 2023 are still being felt by households and businesses. If inflation rises from here, the primary cause is more likely to be a supply-side shock through higher energy prices. This can still be painful for consumers and companies, but it creates a different challenge for central banks and therefore a different backdrop for investment markets.
Central banks have limited tools to address inflation. The main lever, as you will no doubt remember, is interest rate management. Higher interest rates can be an effective way to reduce demand in the economy, because they make borrowing less attractive and saving more rewarding. Interest rates cannot, however, increase the supply of oil or reduce the cost of transporting it through a strategically important shipping route. Significant interest rate hikes in response to an energy shock could therefore do more damage to growth than good to prices, and is why we believe policymakers are unlikely to respond in exactly the same way as they did during the post-Covid inflation cycle.
This distinction is important because inflation is not always bad for investment markets. Unexpected and persistent inflation can clearly create difficulties, particularly if it squeezes margins or household spending, which can directly affect the profitability of many companies. However, sharply rising interest rates are usually more damaging across almost all asset classes, and this is not something we expect to see this time around. This means that whilst headlines warning of another inflationary spike understandably bring back bad memories of the post Covid market hangover, the source of inflation may not lead to the same market outcome this time.
The key risk is therefore not the first move higher in oil prices, but whether higher costs become embedded. If businesses and workers begin to assume that energy prices will remain permanently higher, this can feed into wage demands, contracts, pricing decisions and inflation expectations. At that point, central banks may feel forced to respond more aggressively, even if the original shock came from supply rather than demand. That would be a more difficult environment for both economic growth and investment markets.
For now, the range of possible outcomes remains unusually wide. A sustainable ceasefire and a continued normalisation of shipping through the Strait of Hormuz could see energy prices stabilise and allow markets to refocus on interest rate cuts, company earnings and improving sentiment. Conversely, a breakdown in negotiations or renewed restrictions on shipping could quickly reintroduce a geopolitical risk premium into oil prices. This explains why markets have recently felt unusually reactive, with short-term moves driven more by comments, agreements and perceived breaches of those agreements than by traditional economic data.
Despite this uncertainty, history provides some reassurance. Geopolitical shocks can be severe in the short term, but their impact on markets has often proved temporary when the economic damage is not prolonged. Energy supply shocks are uncomfortable, but if supply routes reopen and prices normalise, markets can recover quickly. Importantly, a recovery in asset prices does not always wait for the world to feel calm again; it often begins when the direction of travel improves, even if the final outcome remains uncertain.
Away from geopolitics, the technology and AI theme continues to dominate investor attention. We see substantial long-term potential in the sector, and there is clearly a lot to be excited about. However, enthusiasm has increasingly been accompanied by valuations that appear to assume a very small number of companies will capture a very large proportion of future profits. That may prove correct in some cases, but history suggests that exciting technologies and early winners do not always maintain their perceived dominance over the long term and markets can cling to exciting, futuristic companies with enthusiasm without always considering all of the risks.
The recent high-profile listing of SpaceX illustrates this point. Although historically viewed as an aerospace company, it is increasingly being valued through the lens of satellite communications, data infrastructure, tech and AI. Its market value moved close to $2 trillion despite the company still being loss-making, which places the valuation in the same broad conversation as some of the world’s largest and most profitable listed businesses. It is entirely possible that future profits justify that optimism, but it is also possible that markets have priced in an exciting story, requiring perfect execution of technologies not yet in existence, as a forgone conclusion.
SpaceX is just an example of a wider trend in that can be seen in the share prices of many AI and AI-adjacent listed companies where risks of future disruption are ignored. With tech, the main risks we think are not being priced sensibly are the potential for competition destroying margins, technological changes reducing barriers to entry and, importantly, the excitement falling short of reality.
This does not mean avoiding investment in technology or AI companies. It means being disciplined about the price paid for exposure and ensuring sufficient diversification across
portfolios. With the diversification consideration in mind, we continue to look for companies and markets where AI can enhance existing business models, improve productivity or support margins, without relying solely on the assumption that today’s most highly valued businesses will capture all of the upside. In our view, this is a more balanced way to participate in one of the most important long-term themes in markets while still respecting valuation risk.
Against this backdrop, our investment approach remains optimistic. We continue to believe that remaining invested is the key to long term growth but want to ensure portfolios are diversified across asset classes and geographies without taking too much valuation risk where the upside is not clear. High-quality companies with pricing power, sovereign bonds offering more attractive yields than in much of the last decade, and a number of income producing real asset investments all have roles to play in portfolios designed to navigate a less predictable environment.
Periods such as this can be uncomfortable as markets sway between fear and greed, but this type of volatility is also a normal feature of long-term investing. Attempting to position portfolios around short-term geopolitical developments is inherently difficult, and the risk of holding too much cash while waiting for clarity remains high. Markets often recover before the news feels reassuring, and missing those positive periods – even when they don’t feel justified by economic fundamentals – can have a lasting impact on long-term returns.
With this in mind, we remain focused on discipline rather than prediction. Staying invested, maintaining diversification and concentrating on long-term objectives continues to provide the most reliable route through periods of heightened uncertainty. The current environment requires patience and a selective approach to portfolio construction, but not a wholesale change in long term philosophy. A well-constructed portfolio should be able to absorb a degree of short-term volatility while remaining positioned to benefit when sentiment improves and markets refocus on the longer-term drivers of return.
This note is intended as a general market update and should not be regarded as specific advice or treated as a recommendation to invest in any particular fund or asset class. Stock market investments can fall as well as rise. If you would like to discuss the implications for your own portfolio, please do get in touch.