With the World Cup now concluded, it is tempting to describe this year's markets in footballing terms. The final score never tells you the whole story of the match. It does not reveal the momentum shifts, the periods of pressure, the nerves, the mistakes or the late drama. So it has been for investors in 2026: a genuine game of two halves.
An uncomfortable first quarter
The opening months were bruising. The war in the Middle East, the closure of the Strait of Hormuz, and a sharp spike in oil and gas prices dragged inflation fears back to the surface. The Strait is not a distant shipping lane; it is one of the world's most important energy arteries, and its closure fed directly into the price of almost everything — transport, food production, plastics and household goods.
Bond markets responded quickly. Investors who began the year hoping inflation would fall and central banks would keep cutting rates had abandoned that optimism by spring. UK gilt yields rose amid two worries: inflation and the country's fiscal position, at a time when overseas investors are needed to fund a significant share of government borrowing. Equity markets turned cautious, and adventurous portfolios with heavy share exposure were marked down more than defensive ones.
A very different second quarter
As hostilities largely subsided and the Strait reopened, energy prices moderated surprisingly quickly, and inflation expectations settled. Attention returned to company earnings — above all, the extraordinary demand created by the build-out of artificial intelligence infrastructure.
The strongest performers were not the fashionable software names but the less glamorous suppliers of the AI boom's “picks and shovels”: memory chips, storage, processors, networking equipment and semiconductor manufacturing tools. The Californian gold rush provides a useful analogy — it was rarely the prospectors who made reliable money, but those selling picks, shovels and denim.
Data centre construction has outstripped the supply of critical components, handing memory chip manufacturers exceptional pricing power and earnings growth. It is that earnings growth, not blind enthusiasm, that explains much of the share price performance delivered in the run-up to the end of the first six months. The strong recovery in the global stock market delivered bountiful returns for portfolios with greater exposure to company shares, rewarding investors who had been prepared to take risk.
The investment outlook
Will AI infrastructure earnings hold? Nobody knows for certain, but it would be wrong to assume demand simply dries up once the initial build-out slows. Components wear out, become obsolete and are replaced by faster, more energy-efficient designs — and efficiency matters enormously when data centres consume so much power.
There are also signs of rotation into industrial automation, power and grid infrastructure, cooling, cybersecurity, defence, healthcare technology and selected financials, aiming to capture the potential productivity boost as AI moves from its infrastructure phase to wider adoption. Contrary to the common perception, the shares of technology giants are not uniformly priced for perfection: For example, shares in Microsoft and Meta have lagged the wider US market, although their heavy AI investment may ultimately protect their competitive positions rather than undermine them.
For bonds, the picture is more finely balanced — and recent weeks have shown how quickly it can shift. Renewed tensions in the Middle East have pushed oil back towards two-month highs, and markets have priced in the possibility of Bank of England rate rises rather than cuts.
For the UK, the Burnham era begins
Andy Burnham has entered Downing Street, replacing Rachel Reeves with John Healey as Chancellor. The bond market delivered an early verdict: talk of seeking ‘flexibility’ within the fiscal rules sent long-dated gilt yields to their highest levels since May. Investors don’t like it when politicians move the goalposts.
Nevertheless, Burnham appears to be listening to people with proven economic literacy, including Jim O'Neill and Andy Haldane. But the lesson of recent decades — a UK stock market that has slipped from the world's third-largest to eighth — is that policy, confidence and growth all matter. A government that discourages enterprise will be scoring own goals.
Even so, PMW clients can look forward with confidence. Diversified, internationally invested portfolios have once again demonstrated their resilience — and proven that, over time, patient investors are rewarded.
