In May, we anticipated fragmentation of global growth against a backdrop of persistently elevated interest rates and energy prices. That scenario has since materialised with a level of precision that, far from surprising us, reinforces our structural reading of markets.
The backdrop remains demanding. Inflation continues to rise, central banks have adopted a more hawkish tone, and any prospect of meaningful monetary easing is receding. In Europe, the European Central Bank (ECB) stands ready to tighten its policy further, while the Fed is expected to keep rates on hold for an extended period. Global growth is fracturing along the fault lines we had identified: between economies that are holding up and those that are running out of steam, between technology exporters and energy importers. The risk of inflation spreading to services and food remains very real should the Middle East conflict prove protracted.
And yet, markets continue to advance. This paradox, which we highlighted last month, is not only holding, it is deepening. Its explanation lies in earnings, not in macroeconomics.
The first-quarter reporting season makes the case compellingly. The artificial intelligence investment cycle continues to generate unprecedented earnings growth within the technology sector. Physical production capacity is struggling to keep pace with demand, creating significant pricing power for semiconductors and hardware, yet we remain in the early stages of this cycle: AI take-up by companies is accelerating, cloud infrastructure growth is surging, and valuations reflect no systemic excess. Earnings are growing faster than share prices.
It is this conviction – grounded in fundamentals and capable of weathering macro cycles – that shapes our allocation. We maintain our long-term overweight on the United States and technology, while being mindful of shorter-term volatility as the upcoming supply from initial public offerings (IPO) is likely to create a drag on the broader equity market in the coming weeks. We are raising our conviction on utilities, underpinned by structural energy demand and left behind since the market rebound in March. The record-breaking IPO of SpaceX will be the first major test of the market’s ability to absorb a massive wave of new equity supply while assigning valuations to highly innovative companies that remain far from profitability. Gold retains its full place in our portfolios, supported by secular forces that the current geopolitical disorder only serves to amplify.
In a world where macro unsettles and earnings reassure, our responsibility is to identify convictions that stand the test of time – and to hold them.
Key messages
- Technology drives global markets
Equities posted another strong month, with technology accounting for 76% of global equity gains in Q2 to date. - Valuations call for discipline
We maintain our positive view on US equities and technology, but are not chasing the rally after a 15% rebound amid growing signs of exuberance. - Utilities: a new upgrade
We have upgraded utilities to 4/5, as they are structural beneficiaries of the AI cycle through rising electricity demand and data centre expansion. - Constructive on the US dollar
US inflation and front-end yield carry support a more constructive view on the dollar, prompting a reduction of USD hedges in non-USD portfolios. - Gold: tactically more neutral
We tactically downgrade gold from 4/5 to 3/5 while retaining our maximum strategic view, as price action has been range-bound, ETF flows have stagnated and the stronger USD reduces near-term upside. - Strait of Hormuz: the key risk catalyst
A reopening of the Strait would be the main trigger for a broadening of market participation, with European equities being the primary beneficiaries.
Our investment stance
Despite the ongoing blockade of the Strait of Hormuz and elevated energy prices, investor sentiment once again proved resilient, with risk assets delivering another set of strong monthly returns in May. During the month, we maintained our overall portfolio stance, making only targeted adjustments in currencies and fixed income. The macro backdrop also remains resilient, even though US inflation is likely to stay above central banks’ targets for some time.
Consequently, we have adopted a more constructive view on the US dollar and reduced USD hedges in non-USD portfolios. US inflation is likely to remain firmer than in other developed markets, while US front-end yields offer support relative to low-yielding currencies. At the same time, the ECB path priced in by markets appears demanding given weak eurozone data. Removing the USD hedge therefore aligns portfolio implementation with a more directional dollar view and avoids hedging costs.
On gold, we tactically downgrade our view from 4/5 to 3/5, while keeping the strategic view at the maximum level of 5/5. Gold remains a strategic portfolio diversifier, supported by central bank demand and longer-term fiscal and geopolitical risks. However, price action has been more range-bound recently, ETF flows have stagnated, and the stronger USD view reduces the near-term upside case. We are therefore moving to a more neutral tactical stance while retaining gold as a core diversifying asset.
In fixed income, we increased duration in euro-denominated portfolios slightly, bringing portfolio duration closer to four years. With euro rates still elevated relative to the medium-term growth outlook, and with markets pricing a more aggressive ECB path than we anticipate, gradually rebuilding duration should improve portfolio resilience without materially increasing overall risk.
In equities, the environment has remained favourable, supported by strong earnings momentum in the technology sector. While valuations are not yet a primary concern in this rally, signs of exuberance are emerging, and the anticipated supply from initial public offerings (IPOs) from SpaceX, Anthropic PBC and OpenAI risks creating a drag on the broader equity market in the second half of the year. We are therefore not chasing the rally after a 15% rebound – the fifth largest over a comparable period in the past seventy years. Our equity allocation benefited from significant exposure to US technology but was partially offset by our underweight in emerging markets (EM) Asia hardware equities, which surged during the month.
The conversations that matter
Are artificial intelligence (AI) and semiconductor stocks in a bubble? Is it time to take profits?
Semiconductor stocks are not in a bubble, but they are trading at a premium. The semiconductor sector, as measured by the SOX Index, is currently trading at around 28x forward earnings, compared with a 10-year historical average of 19x. Although valuation multiples are elevated, they remain within their historical range. The main risk is less about valuation and more about earnings, particularly in certain semiconductor sub-sectors such as flash memory (NAND) and hard disk drives, where prices have roughly doubled. These prices could come under pressure if supply begins to catch up with demand.
Storage companies such as Seagate, SanDisk and Western Digital have historically generated low operating margins, typically below 10%, due to limited product differentiation and intense competition. However, margins have recently risen sharply to above 30%, driven by supply shortages and surging prices. This level of profitability is unlikely to be sustainable over the long term.
As a result, we would remain overweight on semiconductors, particularly semiconductor equipment vendors such as ASML, Applied Materials and Tokyo Electron, as well as on manufacturing leaders such as TSMC. At the same time, we would take profits in storage names following their strong margin expansion and pricing-driven earnings upside.
Are the conditions in place for Europe to outperform?
European equities have lagged behind in performance since the start of the initial Middle East ceasefire on 1 April, gaining 8.1% (STOXX Europe 600 total return) versus global equities at 15.9% (MSCI ACWI) to 3 June 2026. Over the same period, US equities have climbed 15.9% (S&P 500), Japan 16.6% (MSCI Japan), and emerging markets an outstanding 28.5% (MSCI Emerging Markets), albeit mainly led by the heavily concentrated markets of Taiwan and South Korea, while India and China have lagged behind.
Europe’s position as an underperforming outlier can be explained by its lack of exposure to the technology sector (9% weighting versus US 39%, Japan 23%, emerging markets 45%), which has been the best-performing sector since the start of April at 45%, and by the US–Iran conflict having a greater impact on the European economy. The latter is due to the region’s status as an oil importer as well as consumers having weaker purchasing power than their US counterparts. Furthermore, fears of rate hikes by the ECB to combat energy-driven inflation have weighed on regional valuations (14.7x forward P/E versus 16.0x pre-conflict), despite earnings per share (EPS) growth estimates trending higher (20% expected in 2026 versus 15% at the start of the year).
Regaining investor appetite for the region in the near term depends on a resolution to the US–Iran conflict and the reopening of the Strait of Hormuz, where second-order effects from lower oil prices, inflation and interest rate expectations would provide tailwinds to the cyclical and defensive sectors to which the region is mainly exposed. We believe the initial impact could be a sentiment-driven valuation re-rating for the region, allowing performance to catch up with other parts of the world.
If an agreement is reached between Iran and the US, could there be price corrections?
An agreement would likely trigger an initial pullback in both oil prices and energy equities as geopolitical risk premia compress. That reaction would be entirely rational, but it would also likely be short-lived. Physical oil markets normalise far more slowly than headlines suggest. The International Energy Agency (IEA) has called this conflict ‘the greatest threat to global energy security in history’, and the physical damage does not disappear with a handshake. The Strait of Hormuz was carrying roughly a quarter of the world’s seaborne oil and products (over 23 million barrels per day) before the crisis.
Rebuilding pipelines, restarting refineries and restocking reserves takes months, not days. Additionally, disrupted flows, higher shipping and insurance costs, and rerouting expenses would all continue to constrain supply well after any diplomatic breakthrough. Meanwhile, strategic-reserve refilling, commercial restocking and precautionary buying for energy-security purposes would support demand. A return to USD 60–70 per barrel for Brent crude looks unlikely given how much of the oversupply buffer has already been consumed (to date, over 1 billion barrels have been lost). Any dip would likely represent an entry opportunity rather than a structural reversal, as history suggests that any peace-driven price dip is more likely to be a buying opportunity than the beginning of a prolonged retreat. Therefore, given the magnitude of supply disruption as well as resilient demand, UBP’s Brent forecast for 2026 remains unchanged at USD 100 per barrel.
Macroeconomics
World growth at a crossroads
The conflict in the Middle East has become protracted, but hopes for peace prevail. Talks between Iran and the United States have led to a fall in oil prices, reflecting the expectation of a swift resolution to the conflict. Global growth is therefore at a crossroads: after a strong start to the year, activity could slow sharply if the Strait of Hormuz remains closed. Meanwhile, inflation, which has already increased, could spread to other sectors.
Global growth is weakening, but not breaking down
Global growth was supported in Q1 2026 as domestic demand remained strong. However, the effects of rising oil prices and disruption in the industrial supply chain could become more apparent in the coming months, and consumers have already experienced a loss of purchasing power.
Rising fuel prices have had the most immediate impact on consumers, causing confidence to plummet in all countries, including the US. Increased transportation costs have led to a slowdown in services, but these remain favoured by consumers at the expense of goods, particularly cars. Consumption is being supported by tax refunds and a wealth effect in the US, whereas it is under pressure in Europe and Asia.
The investment cycle remains very strong, reinforced by the desire to secure energy and strategic goods in the race for new technologies. In this sector, Europe lags behind the US and is more dependent on public projects, which receive lower funding than that mobilised by US technology firms. However, Europe is trying to accelerate in the fields of defence and energy security.
Overall, the resilience of global growth will once again be put to the test, but fragmentation is already evident. US growth is expected to reach around 2.0%, while China’s growth is projected to be around 4.5%. In our scenario, Europe and Japan are expected to grow by less than 1.0% in 2026. If the conflict drags on, energy‑importing countries and those less involved in new technologies will be the most vulnerable.
Despite hopes for peace, inflation continues to accelerate
The upward trend in energy inflation has resumed and is expected to rise further in the coming months, even if a peace deal is reached. Although the reopening of the Strait of Hormuz could bring spot oil prices back below USD 100 a barrel, normalising oil and gas production and distribution will take longer than anticipated by the markets.
All countries are facing rising inflation, including the US, where petrol prices have increased by 35% y/y. At best, peak inflation could be reached during the summer. However, US inflation is expected to exceed 4%, while eurozone inflation has already risen above 3.0%, reaching 3.2% in May, with further upside risk should energy prices remain elevated. Meanwhile, China has emerged from deflation (standing at 1.2% in April) thanks to higher energy costs and moderation of the domestic price war.
If the conflict in the Middle East continues, the risk is that the energy crisis will spread to other sectors, such as services and food due to production disruptions for certain products, such as fertilisers and petroleum inputs. Services, which are already being affected by transport issues, are likely to continue rising by more than 3% unless the conflict ends and expectations of price increases are reversed.
A new monetary regime is emerging
In the face of rising inflation and the risks of transmission to core prices and wages, central bank communications have become more hawkish. Strategies are being recalibrated, with some rate hikes expected in parallel to a stronger commitment to a medium‑term inflation target of 2%.
Several banks have already raised their rates, but responses vary, resulting in different monetary cycles across countries. The Federal Reserve (Fed) is expected to maintain stable rates for an extended period, and a similar strategy should be adopted in the UK due to fragile growth and employment. The ECB is prepared to raise rates, but according to our scenario, only one increase is expected, even though the market is pricing in several potential hikes. While some rate hikes are expected in Asia in the coming months, the overall tightening cycle should remain limited in our scenario. Furthermore, if a durable peace were to prevail in the Middle East, the prospect of rate cuts could emerge by 2027.
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The financial instruments and investment strategies portrayed in this document are for informative purposes only. They may differ from those effectively held in an investor’ portfolio. Depending on the jurisdiction and investment profile, one or some of these instruments and strategies – including, where applicable, options – may not be permitted, available or suitable. The opinions expressed herein are correct as at 8 June 2026 and are subject to change without notice. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
