Q2 2026 Market commentary

Following the geopolitical and geoeconomic challenges that shaped a volatile first quarter, global markets rebounded strongly over Q2, led by the continuing AI boom and renewed demand for semiconductors in emerging markets. Global equities experienced a broad-based rally while a brief de-escalation in the US-Iran conflict helped to lower oil prices below an April peak of $120 per barrel. A Memorandum of Understanding signed by the warring parties in June mandated an immediate end to hostilities, reopening the Strait of Hormuz to commercial vessels and easing the strain on commodity supplies – events at the end of the quarter nevertheless demonstrated that tensions in the Middle East are far from being resolved. Commodities generally underperformed, though the industrial metals sector benefited from the growing demand for AI data centres and supporting infrastructure. Capital expenditure also remained high for global energy infrastructure and defence. Global bond markets delivered modest gains on the back of strong quarterly earnings, with the Global Aggregate Index rising 0.9%.

Rallying US equities saw major indices record all-time highs during the quarter, the S&P 500 experiencing a 15.2% gain. AI was the predominant driver of performance, supporting manufacturing activity, improving productivity expectations, and underpinning strong tech-related earnings growth. The communications and finance sectors also saw their growth forecasts revised upwards over the quarter. Despite fears for the growth forecast at the end of Q1, the US economy proved more resilient than anticipated thanks to increased industrial activity and corporate investment, steady employment, and healthy consumer spending. Despite persistent affordability concerns, consumer resilience was bolstered by a solid labour market, continuing wage growth, a general increase in combined household wealth, and changing trends in discretionary spending. 

Starting in April, businesses affected by US tariffs imposed under the 2025 International Emergency Economic Powers Act (IEEPA) became eligible for refunds. Following a Supreme Court ruling in February that the provisions of the IEEPA exceeded presidential authority, roughly $166 billion of tariffs were earmarked for redistribution – it’s estimated that the total covers over 53 million shipments, with eligibility likely to extend to more than 330,000 importers. An official claims portal opened for phased refunding, though operational and legal challenges may complicate repayment timelines. While businesses could see billions returned to them, consumers are unlikely to benefit from widespread price drops.

The Federal Reserve saw a change of leadership during the second quarter with financier and attorney Kevin Warsh replacing outgoing Fed chair Jerome Powell on 22 May. Having intimated he would seek “regime change in the conduct of policy” to address a perceived “credibility deficit” in the run-up to his appointment, Warsh shared details of departmental taskforces set up to review the full range of Federal Reserve functions and objectives. Warsh’s first move was to scale back on direct communications from the Fed, specifically stripping out the “forward guidance” notes that markets have traditionally looked at to gauge the future direction of monetary policy. Warsh also announced plans to change the way the Fed measures inflation, advocating “trimmed averages” that ignore inflation outliers that aren’t necessarily representative of underlying trends – critics suggested that trimmed averages could understate true inflation over time and limit opportunities for the Fed to react appropriately. Other taskforces will review the data used by the Fed to measure economic performance, assess the potential benefits and impacts of AI, and explore ways to shrink the Fed’s $6.7 trillion balance sheet. Warsh’s first policy meeting in charge saw the Fed hold their base rate spread at 3.5%-3.75% – the accompanying Committee statement was heavily reduced in scope and contained no information on how members voted.

UK equities ended the quarter in positive territory, with the FTSE All-Share index returning 4.7%, though high exposure to the commodities downturn kept gains well below those of major economy counterparts. Domestic markets benefited from a more defensive sector composition and large exposure to overseas earnings. Other positive contributors included the defence and industrial sectors amid ongoing geopolitical tensions, financials on the back of expectations of stable UK interest rates, and energy due to strong earnings following a volatile quarter. More domestically focused stocks lagged as high borrowing costs continued to impact demand.

After a weak end to 2025 prompted a more circumspect outlook for domestic growth, UK GDP grew 0.6% over the first quarter of 2026, driven primarily by major uplifts in wholesale and retail trade. The Office for National Statistics estimated that output across the services sector was 1.4% higher than the same period in 2025. Consumer spending was relatively resilient over the quarter, but business investments and manufacturing activity were notably subdued. High energy prices remained a concern for industries, while job vacancies fell to their lowest level in five years. Figures showed that the number of young people not in education, employment or training (NEET) exceeded 1 million for the first time in 13 years. Despite ongoing political uncertainty, GDP growth forecasts for 2026 clustered around the 1% mark.

The Bank of England’s Monetary Policy Committee (MPC) held UK interest rates at 3.75% for the fourth consecutive meeting, citing continuing uncertainty around inflation and the wider economic outlook – two MPC members voted to increase the base rate to 4%. UK inflation sat at 2.8% in May, unchanged since April, though the food price inflation indicator fell from 3% to 2.2% in the same period, reaching its lowest rate since December 2024. Services inflation increased from 3.2% to 3.7% between April and May.

Though gains varied by country and sector, equities in the Eurozone delivered positive returns over Q2, with the MSCI Europe index recording a 14.4% gain. Key performance drivers included continued increases in European defence spending, ongoing investment in bloc-wide energy transition and digitalisation infrastructure programmes, and strong earnings data from the financials sector. Manufacturing, however, remained weak and European exporters weren’t immune to the uncertainties affecting global trade. A more positive outlook for regional growth was supported by higher consumer spending against a backdrop of wage recovery, improving activity in services sectors, and lower borrowing costs filtering through to the wider economy. 

After a lengthy easing cycle, the European Central Bank voted to raise all three of their key deposit, refinancing and lending interest rates by 25 basis points – the first hike approved by the bank’s governing council since 2023. Reinforcing their commitment to a data-dependent approach, the ECB explained the move as a sensible and forward-thinking plan to navigate and absorb the evolving shocks from the US-Iran conflict and maintain inflation stability.

AI: data centres are increasing the strain on energy, while big tech lobbying budgets spiral

Research by the International Data Centre Authority (IDCA) indicated that growing power usage and demand for grid connectivity across AI data centres in major economies could trigger “significant community and political backlash”. Global annual AI infrastructure investments were approaching $1 trillion and the energy used to power facilities had increased by 15% in just two years. The global average for data centre energy consumption was estimated to be 2%, but the UK and US both recorded consumption rates of 6%. The IDCA warned that societal pushback was likely to occur in countries where data centres consumed more than 5% of domestic grid capacity. In some countries, consumption rates were approaching unsustainable levels: Singapore’s data centre network consumes nearly a fifth of the country’s grid capacity.

The UK’s consumption rate was significantly higher than the government’s 2.5% estimate published in 2025, and a 460% increase in connectivity applications during the first half of the year prompted reforms to tackle speculative applications delaying strategically important projects. The government also conceded it had seriously underestimated the climate impact of the UK’s AI development programme – data from the Department for Science, Innovation and Technology estimated that domestic data centres could result in up to 123m tonnes of additional carbon emissions, roughly equivalent to the carbon footprint of 2.7m people. IDCA estimates placed the current value of the global digital economy at around $16 trillion, or 15% of the world’s nominal GDP. 

While the risks around energy use and public backlash are real, they are not necessarily fixed or unmanageable. Improvements in technology mean that AI and data centres are becoming more efficient over time, with better chips, smarter software and more effective cooling systems helping to reduce the amount of energy needed for each task. At the same time, governments and companies are starting to respond more actively for example, by increasing the use of renewable energy, improving how data centres interact with the grid, and reforming planning systems to prioritise more strategic projects. These measures do not eliminate the risks of grid strain, local opposition, water use, or emissions, but they do suggest that outcomes will depend significantly on execution. Operators need to carefully consider and plan for where facilities are located, how they are powered and cooled, and how they can work with policymakers to make new capacity cleaner, more flexible and more accountable to host communities.

Global marine protection efforts progress towards biodiversity framework targets

Data from the World Database on Protected and Conserved Areas (WDPA) indicated that global ocean conservation efforts were progressing towards the Kunming-Montreal Global Biodiversity Framework’s target of 30% ocean and inland waterway protection by 2030. The recent addition of 284 marine or coastal protected areas across Indonesia and Thailand pushed global marine protected area (MPA) coverage beyond 10%. MPA additions in Australia and French Polynesia saw those countries join 31 others already protecting more than 30% of their territorial waters. 

While the passing of the 10% threshold marked a significant milestone for ocean conservation, experts warned that an area the size of the Indian Ocean would still require MPA status if the 30% protection target was to be achieved by 2030. Concerns were also raised about the quality and effectiveness of many existing MPAs and the comparatively low volume of ocean coverage classified as fully or highly protected.

Amazon rainforest sees lowest rate of deforestation in six years

Last year, Brazil recorded the lowest annual rate of deforestation in the Amazon since the monitoring network MapBiomas began tracking the health of the country’s major ecosystems in 2019. Data showed that Brazil lost 985,000 hectares of native vegetation in 2025 (a 20.6% reduction from the previous year), while deforestation across the Amazon fell by 23.5%. The slowing rate of decline was good news for Brazilian president Luiz Inacio Lula da Silva, who is seeking a fourth term in office. During his first two presidencies and since his re-election in 2023, Lula has targeted a 0% deforestation rate in Brazil by 2030. 

MapBiomas acknowledged the increasing effectiveness of Lula’s anti-deforestation policies with tougher enforcement actions and sanctions driving down illegal logging and biodiversity loss across all Brazilian biomes. However, the principal drivers of ongoing nature loss in Brazil highlighted critical economic and environmental challenges. Agriculture was responsible for 99% of the country’s vegetation loss: large areas of forest have been cleared for soybean cultivation, a major driver of agribusiness and export markets, while Brazil’s status as a global beef producer has resulted in significant canopy loss to create pastureland. Despite the success of Brazil’s policy-driven crackdown, MapBiomas estimated the current rate of deforestation in the Amazon at five trees every second.