In June, we highlighted a paradox: a demanding macroeconomic environment, yet markets buoyed by exceptional corporate earnings. The mid-year point validates that reading and brings with it a turning point. The recent agreements between the United States and Iran have drawn a line under the energy shock that dominated the first half of the year, and the landscape now opening up is a different one, calling for greater selectivity.
The first half of the year left behind a lasting lesson: when equities and bonds fell in tandem, traditional diversification mechanisms showed their limits, and alternative strategies played their role to the full. They remain a cornerstone of our portfolios, with a preference for strategies offering strong alpha generation.
It is in fixed income that this change of regime opens up the most opportunities. After a disappointing start to 2026, this asset class should regain momentum in the second half of the year. Our priority is to strengthen carry, favouring those segments that offer the best balance between income and risk – an approach that holds true across all major currencies.
In equities, the bull market dynamic remains intact, under the close watch that the technology investment cycle continues to warrant. We are initiating a rotation towards broader, higher-quality exposures: emerging markets, at the heart of the global semiconductor supply chain, and Europe, where fundamentals are improving and easing energy prices are providing a tailwind.
Last, gold may warrant an adjustment in portfolio construction in the near term, while retaining its role as a long-term diversifier.
Our priorities for the second half of the year are clear: reducing concentration risk, maintaining a measured equity stance, and favouring markets with the strongest fundamentals. In a world undergoing a regime shift, our responsibility remains the same: to hold convictions that stand the test of time and to adjust, with discipline, the way we implement them.
Key messages
1. Earnings remain the market’s true driver
2026 profit estimates have almost doubled since the start of the year, largely on the back of artificial intelligence (AI)-related investment, confirming an earnings-led rather than valuation-led market.
2. Corporate high yield and hybrid AT1s
Within fixed income, we have raised our conviction on corporate high yield and hybrid additional tier 1 (AT1s), enhancing income while keeping overall interest-rate sensitivity broadly neutral.
3. Equities rotate towards breadth and quality
We have shifted our exposure from defence and China, tilting instead towards Europe and emerging markets – economies at the heart of the global semiconductor supply chain and which are benefiting from easing energy costs.
4. Gold: strategic conviction revised
We have tempered our strategic conviction on gold, reflecting fewer near‑term catalysts amid a stronger US dollar and slower rate cuts.
5. Alternatives lean into option-based resilience
We have added to systematic, option-based quantitative investment strategies, which favour income generation and downside protection.
Our investment stance
Even the year’s most significant geopolitical shock – the conflict involving Iran – has not derailed economic growth or financial markets. Oil prices have remained resilient to the supply shock, and we now see the risks around that level increasingly skewed to the downside, as the peace deal is likely to unleash a wave of supply. What matters most for financial markets is that corporate earnings remain the key driver. We began the year expecting solid profit growth for 2026; since then, estimates have almost doubled, largely driven by investment linked to artificial intelligence (AI). This is an earnings-led market rather than one driven by higher valuations, which supports keeping overall exposure to risk assets.
However, we expect a more volatile market in the months ahead following the strongest equity rally seen in the last quarter in six years. Financing the AI build-out – trillions of dollars between 2025 and 2030 – requires significant capital and is likely to disrupt the pace of global earnings growth. Large technology companies are redirecting cash from buybacks to investment, while new equity issuance and listings are rising. That shift does not undermine the long-term thesis, but it could increase volatility even as fundamentals remain constructive. In this respect, we have deliberately tempered overall conviction-level exposure in the near term, which we intend to redeploy as visibility improves.
In our alternative portfolio allocation, our positioning reflects a clear priority: to participate in upside while actively managing risk to stabilise returns. Rather than chase the technology rebound, we have added to systematic, option‑based strategies – quantitative investment strategies (QIS) – that better fit our scenario. These strategies use options to shape the return profile – seeking income, maintaining protection, and retaining upside participation – so portfolios can stay engaged without relying solely on market direction.
In equities, we exited our exposure to defence companies as budgets and innovation dynamics shift. We have tilted towards Europe, where easing energy costs and improving fundamentals quietly strengthen the case for the region. Additionally, we sold our Chinese exposure given persistent structural headwinds and a lack of near‑term catalysts; we reallocated towards global emerging markets (EM). With oil steady and risks lessening, we have downgraded the energy sector and see more attractive prospects in utilities, which are benefiting from infrastructure investment tied to AI.
In fixed income, returns have lagged behind cash year‑to‑date as a modest repricing in rates compressed carry. We think the bulk of that rate stress is now behind us and expect steadier bond markets with the potential for some catch‑up, although not a dramatic rally. We have raised carry in the portfolios by increasing exposure to higher‑yielding segments and have upgraded the rating on the sub-asset class. With growth still resilient and default rates contained, this balance aims to enhance income without adding duration risk, thus keeping overall interest rate sensitivity broadly neutral.
Last, we have lowered our strategic level of conviction on gold and trimmed exposure in portfolios. The long-term role of gold as a diversifier remains intact, supported by central-bank demand – even if recent purchases have come from a narrower group of buyers – and by continued reserve diversification. Near-term catalysts have softened, however, as rate cuts have slowed and the US dollar has strengthened, with gold exchange-traded funds (ETF) having shed more than 2% of their holdings since the outbreak of the Middle East conflict – the largest such outflow since 2021. We see the opportunity skewed more towards the end of the year.
The conversations that matter
Does the recent market rotation towards Europe reflect deteriorating US/technology sector fundamentals?
The recent market rotation towards Europe since the end of May (STOXX Europe 600 total return +4.1% to 6 July vs. S&P 500 -0.4%, Nasdaq 100 -2.0%, MSCI Emerging Markets -1.3%) reflects a recalibration of market positioning, with certain areas of global equities having become extended after strong performances over the first half of the year, namely emerging markets at +24.0% and the Nasdaq 100 at +20.3%, against +11.5% for global equities. The first two have benefited heavily from elevated exposure to the artificial intelligence (AI) infrastructure build-out trade, where industry bottlenecks have driven surging earnings growth and elevated visibility, while geopolitical events have clouded the earnings outlook elsewhere, both regionally and by sector.
As geopolitical tensions and oil prices ease, relative visibility is improving outside the technology sector, whose structural growth visibility had been favoured by investors over the first half of the year, driving US and emerging market outperformances. In this respect, Europe is among the least exposed to the technology sector among regional indices, having elevated exposure to more cyclical and value-oriented areas of the market instead (financials, industrials and healthcare together represent over 50% of index weightings). Improving economic conditions, combined with relatively cheaper valuations, have led investors to use Europe as a hedge against their AI exposures.
While we do not believe that US/technology sector fundamentals have deteriorated, a consolidation phase may persist in the very near term, or at least until second-quarter earnings are published, when corporate commentary will be the next leading indicator of whether AI-related growth expectations remain valid or require revision.
Fixed income returns have lagged behind carry year-to-date. What explains this, and what should investors expect through to year-end?
Fixed income returned less than carry (the start-of-year yield) through the first half of the year, with rates being the principal culprit. The ranking across sub-classes tells the story: the more carry a sector offered, the closer it came to earning it. Emerging market debt (3.3% year-to-date) and AT1s (2.4%) came closest, helped by spread compression that offset part of the rate move. High yield (HY), investment grade (IG) and Treasuries fell progressively further short of their carry, with Treasuries and IG – offering the least spread cushion – falling furthest behind.
Rates rose on the back of the oil shock triggered by the US-Israel-Iran war and the closure of the Strait of Hormuz, which lifted inflation risk and shifted market pricing from rate cuts to rate hikes (with the European Central Bank (ECB) duly delivering one). Further hikes remain priced in, though we do not expect them to materialise. Spreads were volatile over the period but have since settled back to start-of-year levels or tighter; with fundamentals remaining favourable and the economy still resilient, we do not anticipate significant widening from current levels.
After a disappointing year, is the smaller gold allocation a change of conviction?
Since the beginning of January, gold is down by around 3%, following a 60% rise in 2025. Our recent decision to reduce the gold allocation reflects prudent risk management in light of the high levels of volatility that we have seen across the entire precious metals complex lately, and rising bond yields across most developed markets. Gold is the largest standalone position in our portfolio and further rises in yields could potentially weigh on gold prices. We note that retail investors have reduced gold allocations since March, reflecting a re-correlation between gold prices and nominal yields, which had broken down in 2024 and 2025.
Falling oil prices should reduce upside risks to yields in the coming months, and once the outlook for core inflation becomes clear by the end of Q3 it should result in increasing gold purchases by both retail and institutional investors. This dynamic should push gold towards higher levels by year-end.
We maintain a strong conviction that gold will rise substantially over the medium term. This view reflects ongoing central bank purchases, heightened levels of geopolitical uncertainty, and a hedge on the effects of compounding inflation over time. Increasing government debt and deficits also present upside risks to gold.
Macroeconomics
Markets have welcomed the ratification of the US-Iran memorandum of understanding, as reflected in a sharp drop in oil prices. The tail risks of spiralling inflation and slowing growth have thus receded, with trade flows through the Strait of Hormuz gradually recovering.
US growth to remain resilient in H2
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.
Central banks to keep rates on hold, while inflation has probably peaked
Inflation picked up in the first half of the year, but is likely to have peaked, as oil prices have fallen sharply. In the US, headline inflation (already above 4%) is expected to average about 3.7% in 2026, with core inflation likely to edge higher in the coming months and average around 2.8% for the year. In the eurozone, inflation rebounded above 3% in May and should remain elevated in the near term. Core inflation is likely to run at between 2.3% and 2.8% in the second half of the year, driven by sticky inflation in services. Globally, inflation should reach roughly 3.7% in Q3, likely the high-water mark for 2026 if a Middle East peace framework holds.
Central banks adopted a more cautious stance in June, with some, including the ECB and several Asian authorities, raising policy rates. Lower oil prices reduce the likelihood of further tightening. As such, we expect the Federal Reserve (Fed), the Bank of England (BoE) and the ECB to keep their rates on hold through 2026. A lasting peace in the Middle East and a clearer inflation downtrend in 2027 could reopen the door to rate cuts next year.
Fiscal deficits will remain wide in 2026, as European and Asian governments have subsidised sectors or cut taxes to offset the oil shock. Even as these measures expire in Q3, budget gaps are likely to stay large, including in the United States, and show little improvement on 2025. Public debt ratios will continue to climb, with debt-servicing costs rising steadily in parallel.
Monetary Policy: projection major key rates (2026-2027)
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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 3 July 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.
