Welcome to our third quarterly Markets & Economic Summary of 2026, in which we look back on the performance of markets and economies around the world during the last three months and what we can expect going forward.
Quarterly Overview
Overall, strong global market performance despite geopolitical tensions, particularly due to the Iran conflict.
US Market:
- S&P 500 rose 14.87% in Q2, largest gain since 2020.
- Growth driven by strong corporate earnings and Artificial Intelligence (AI) investments.
- Broader gains beyond top tech stocks.
UK Market:
- FTSE 100 increased 3.15%, best back-to-back performance since 2022. Driven by defense, mining, and financial sectors
European Market:
- STOXX 600 grew over 10%, benefiting from AI and reduced Middle East tensions.
- Tourism and travel stocks rebounded alongside oil price reductions.
Asia-Pacific Market:
- Japan’s Nikkei 225 surged 37.21%, aided by tech and AI stocks.
- China’s Hang Seng index fell 7.69% due to property market issues and consumer deflation.
Gold Prices:
- Experienced volatility, worst quarterly drop in 13 years.
- Influenced by a strong dollar and inflation; central banks continue buying.
Fixed Income:
- Volatility driven by inflation expectations and oil prices.
- Strong corporate fundamentals keep bond spreads narrow.
Economic Outlook:
- Fragile US-Iran peace agreement impacts oil prices.
- Global GDP growth revised down to 2.5-2.7%.
- Strong company earnings despite economic slowdown.
Future Projections:
- S&P 500 expected between 7,600-8,000 by year-end.
- FTSE 100 projected between 10,750-11,570, influenced by inflation and government policies.
Markets
Global financial markets have delivered strong performance over the past three months, with equities leading the returns despite periods of heightened geopolitical uncertainty and fluctuating energy prices – mostly attributed to the Iran war (although there have still been skirmishes following the peace deal agreement, with President Trump at the time of writing now declaring the deal over). Despite sounding like a broken record, the usual drivers of the excellent performance were strong corporate earnings, continued enthusiasm surrounding AI and growing confidence that central banks are approaching the latter stages of their tightening cycles.
US equities, as has been the case for the last 10+ years, were among the strongest performers, with the S&P 500 recording its largest quarterly gain since 2020, supported by earnings, capital expenditure into AI infrastructure, and ultimately investor sentiment. However, rather than gains being concentrated just on the “Magnificent 7” tech stocks, they have broadened out to include chip manufacturers, industrial and healthcare companies, as well as other smaller and medium-sized companies. It had surged by more than 14% over the second quarter, closing out on 30th June at 7,499.36.
The FTSE 100 in the UK, on the other hand, rose by roughly 3% in the last quarter, which makes it the index’s best back-to-back streak since 2022, following a 2.5% increase in the first quarter of this year. Returns were mostly driven by defence stocks, which surged on the announcement of the Government’s security commitments. Mining companies and the financial sector also helped lead the way. The more UK-focused index, the FTSE 250 lagged more than the FTSE 100 due to contractions in domestic services and private sectors.
As the conflict has de-escalated and oil prices have reduced, tourism and travel stocks have also bounced back, helping the rally. In Europe, the STOXX 600 index grew by over 10%, which made it the strongest quarterly performance for the index since 2020.
This was driven by a combination of the AI boom and the eased tensions in the Middle East following the peace agreement between the US and Iran. Europe is more affected by the Middle East conflict due to its reliance on the Gulf countries’ oil.
In the Asia and Pacific region, Japan’s financial markets had a storming quarter with the Nikkei 225 index up 36%, closing at 70,062.32 at the end of June. Similar to the US and Europe, this was driven by a rebound in technology and AI-related stocks following a decline during the Iran war. As has been mentioned in previous commentaries, Japan’s manufacturing and industrial output continues to grow, alongside companies holding more than sufficient quantities of cash on their balance sheets for further expansion and investment. When you pair this with the Japanese government reforming corporate governance across the country and their monetary policy (i.e. positive rates and wanting inflation) then the future does indeed look bright for the country’s economy and financial markets. Investor sentiment also aided the markets, following the announcement of the peace agreement between US-Iran as Japan, as like many Asian countries it is reliant on the Middle East for oil.
Elsewhere in Asia, China’s Hang Seng index had negative returns over the second quarter and over the past year. It has had a severe property market collapse with steep declines in property investments which have eroded household wealth and consumer confidence due to many unfinished developments. There has also been prolonged consumer deflation, which has discouraged domestic spending and corporate investment into the economy. China is another country that sorely missed its regular imports of oil from the Middle East during the past few months, which created a drag on economic growth.
Index
Quarter 2 (April-June) Performance %
Year to Date Performance %
One Year Performance %
FTSE 100 (UK)
3.15
6.96
20.88
S&P 500 (US)
14.87
9.11
20.12
Euro STOXX 600 (Europe)
10.05
9.03
19.59
Nikkei 225 (Japan)
37.21
35.54
76.16
Hang Seng (China)
-7.69
-10.34
-1.14
Gold
-14.18
-4.80
27.90
Gold
The gold price has been volatile over the last six months to one year as can be seen in the table above. Particularly in the last quarter, gold suffered its worst quarterly drop in 13 years. This was largely pushed by a stronger US dollar, high inflation and expectations that the Federal Reserve (the Fed) among other central banks would keep rates higher for longer.
The Middle East conflict exacerbated oil prices which resulted in supply-side oil-driven inflation which historically has caused gold to trade as an inverse proxy. However, gold prices are still higher than they were one year ago, which is mostly thanks to aggressive buying by the world’s central banks to hold a neutral reserve asset and reduce their reliance on the US dollar.
Fixed Income
Within the fixed income markets, there has been a large amount of volatility due to shifting inflation expectations, oil price spikes and central bank reactions. Generally, over the last few years, an income-focused strategy has been favoured as capital gains have been pressured by rising government bond yields across both developed and emerging markets.
Corporate fundamentals and balance sheets of companies that issue bonds, however, remain strong and resilient, which has kept spreads (difference in yield between two bonds) narrow, unlike government bonds where yields have been pushed higher due to inflation risks, central banks not cutting rates quickly, and the perception of high levels of government debt (particularly UK, Europe and US).
Economics
The Middle East conflict between the US/Israel and Iran had effectively ended with the peace agreement agreed and signed by both the US and Iran governments on 12th June 2026. However, there has still been some skirmishes on the Strait of Hormuz as Iran tries to impose its authority and control of ships passing through the Strait, which the US and neighbouring Gulf countries object to on the grounds that it is an international waterway and should be free to pass. At the time of writing Iran, had struck 3 ships passing through the Strait, and the US responded with strikes on 80 military targets, with President Trump quickly declaring the peace deal was over and no longer in effect. So, there could still be a rocky road towards an end to the war.
On the positive side, however, the fragile peace agreement had resulted in the oil price dropping significantly, with Brent Crude Oil now around $75-80 a barrel, compared with around $105-115 during the main phase of the war. This is crucial for both the UK and Europe, as well as large parts of Asia, as it reduces costs for businesses and individuals alike, which in turn will help quell a restart to aggressive inflation which would undo the hard work the central banks have done in combating it.
The above has played its part in keeping inflation sticky, particularly in the UK, US and Europe. The central banks have been hesitant to cut rates further, fearing this would exacerbate the sudden increase in inflation already caused by the war and higher oil prices. In fact, the European Central Bank (ECB) actually raised its main deposit rate by 0.25% in June to 2.25%. The effect of rates being higher for longer is that economic growth becomes harder to achieve. Institutions such as the World Bank have revised global Gross Domestic Product (GDP) growth downwards for 2026, averaging around 2.5 – 2.7% as higher energy costs have squeezed real incomes (after inflation).
So why then are stock markets flying when economic growth is slowing? Well, excluding the sentiment around AI, the simple answer is earnings. Despite several inflationary shocks and setbacks in recent years, the largest companies have mostly continued to deliver strong revenues and record profits (yes, some earnings are linked to AI, such as semiconductor sales for example). So, if companies are doing well and holding up economies, then why is GDP growth struggling? Well, the answer to that is government spending. Globally, but particularly in the UK, US and Europe, governments have racked up levels of debt equal to or in excess of the country’s entire GDP. This leaves them paying more and more in interest each year to service the debt and leaving them only two options to fix it. They either increase taxes or make cuts to spending. This is where the UK and US slightly differ, with President Trump famously making cuts to several government departments, particularly foreign aid, and introducing tariffs on trade to increase government revenue.
In the UK, however, under the current Labour government, welfare spending has gone up (£333.7bn for 2025/26) and now exceeds the amount of income tax collected. The government has relied on an increase in taxes, such as bringing pensions into people’s estates for IHT purposes on death and increasing National Minimum Wage and National Insurance Contributions for employers to fund the deficit instead of making cuts.
This makes businesses less profitable and, in most cases, results in job losses. It also means that because the bond markets don’t like the Government’s profligacy that the interest rate we have to pay on Government debt is now the highest of all the G7 nations and more than double the amount spent on defence.
Despite the war, Asian countries such as China, India and Vietnam demonstrated resilience thanks to robust domestic consumption and a huge capital investment in AI. The energy supply risks from the war still impacted those countries, however, with China particularly seeing a slowdown in manufacturing and exports, which resulted in a slight cooldown in economic growth, with GDP growth estimates being around 4.5%. India remained a primary source of growth and benefited from the resilient private consumption, with real GDP now projected around 6.2% for the year. Countries like Korea also saw growth, largely thanks to the AI boom however.
Outlook for the second half of the year
The expectation was that the peace agreement between the US and Iran should hold (although it was very fragile) and that oil prices would continue to come down slightly more in the coming six months. However, with Trump now declaring the peace agreement over, oil prices are likely to begin rising again unless both sides can show restraint and re-agree the peace deal and stick to it.
If some sort of truce returns fairly quickly then, as mentioned previously, it is highly unlikely that the global economy (specifically UK, Europe and US) will see economic disruption at the levels we saw in 2022.
Although the global GDP growth was revised down by some institutions to 2.5 – 2.7% (in the last economic summary, it was estimated to be around 3.1%), it is expected that overall economies will remain resilient and ultimately that companies will continue to do well and in turn, the financial markets. The S&P 500 index is predicted to be between 7,600 and 8,000 by the end of 2026, which still represents a positive return compared to its current level. The continued capital expenditure from the large technology companies into AI, plus their record revenues, should also help keep the index on track to this target.
However, it is not just technology companies that are likely to do well from the AI boom, but the rest of the market too. Returns should broaden out across the index and also globally. This is in part because the AI boom relies heavily on infrastructure and hardware, such as the metals that need mining to make the chips, the data centres that need to be built so there is enough memory storage, and also the electricity grid itself will need expanding to be able to cope with the extra consumption by such data centres.
So, the AI boom really does represent a chance for many companies across the world to partake in the potential returns on offer. We have already seen countries such as Korea, Taiwan and China achieve strong returns on their stock markets due to AI. At the last summary, it was forecast that Korea could grow by up to 30%, and in the last quarter alone, it achieved a return of 87%. Although there are worries that these returns were pushed up significantly by leveraged funds and shares.
The FTSE 100 index is projected to be between 10,750 and 11,570 by the end of the year, however, this ultimately depends on domestic inflation, global politics such as the Iran war, and any changes in currency strength (since over 70% of earnings in the FTSE 100 come from overseas). The government will also play their part, if fears that taxes could increase further or borrowing pushed higher under a potential Andy Burnham government then company earnings may take a hit. On a positive note, AJ Bell forecasts that it could be a record-breaking year for dividend payouts and share buybacks. One point to note is that if inflation continues to be sticky in the UK, then there is a small possibility that the Bank of England (BoE) could follow in the ECB’s footsteps and raise rates in the coming months.
Europe, despite strong financial market returns, faces a period of sluggish growth due to the energy shock caused by the Middle East and also high regulatory burdens. Whilst oil prices have come down, many companies will have fixed in future orders at higher prices and may even still be waiting on previous orders due to the huge backlog of tankers that weren’t able to transit the Strait of Hormuz in the last few months. The European Commission projects full year GDP growth at 1.2%.
As always, a well-diversified portfolio remains the best defence against uncertainty helping investors capture upside potential while protecting against inflation, inevitable market corrections, and shifting global sentiment.
If you’re an existing client and want to discuss any of the points raised in this article or want further assistance, please contact your usual Fogwill & Jones adviser who will be happy to help you. If you are not an exisiting client, but are interested in using our advising services, please get in touch below.
Simon Briggs
Chartered Financial Planner, Director & Compliance Manager
Liam Burnett
Investment Analyst