Toni Meadows, Head of Investment at BRI Wealth Management, explores the key themes that shaped global financial markets in Q2 2026 and the factors likely to influence market performance in the third quarter.
Global markets delivered a strong second quarter in 2026, with investor optimism prevailing despite geopolitical uncertainty. Early in the period, attention remained on the Middle East conflict and the inflationary impact of high energy prices.
Sentiment improved as tensions de-escalated and oil fell into quarter-end. Confidence also grew that the artificial intelligence (AI) investment cycle would remain intact, supporting risk appetite. In contrast, global bonds made only modest gains as government bond yields rose, while commodities fell on sharp declines in oil and precious metals.
Equity markets were driven by a renewed rotation into technology and growth sectors. This supported a sharp upgrade in company earnings expectations, with global equity earnings growth forecasts revised up to 27.6%. Smaller companies performed best, benefiting from strong demand for businesses exposed to the AI supply chain.
Semi-conductor and memory stocks also led markets as their products are in short supply. Meanwhile, the large tech companies spending the money on AI infrastructure, the Mag7, underperformed due to the uncertain return on their investment.
Regional performance was positive but varied. Asia ex-Japan was the standout performer, led by Korea and Taiwan. Semiconductor and electrical equipment companies drove gains, underpinning Korea’s strongest quarterly return since 1998. Emerging markets had their best quarter since 2009, supported by AI-related exposure.
By contrast, energy-heavy markets in the Middle East and Latin America lagged, while China underperformed due to weakness in retail and autos. Japan performed strongly, helped by a weaker currency and steeper yield curve. US equities benefited from a robust earnings season, with 85% of companies exceeding expectations.
Europe ex-UK gained on improved sentiment, while the UK lagged because of its defensive composition and exposure to falling commodity prices. Valuation support still underpins the long-term story for UK companies.
Fixed income markets were mixed. UK Gilts gained 2.1%, supported by softer growth data and lower-than-expected inflation. In Europe, government bonds performed well despite the European Central Bank raising rates to 2.25%. US Treasury yields were broadly unchanged as markets balanced higher inflation against contained wage growth.
Japanese government bonds underperformed after the Bank of Japan raised rates to 1.0% and yields rose. Credit markets were more resilient because company balance sheets are not stretched and earnings are growing. This kept the premium over government bond yields small, allowing both high yield and investment grade corporate bonds to outperform government bonds. The exception was emerging market government debt, which gained, reflecting the positive economic backdrop that also supported equities in those regions.
Inflation trends improved modestly, although earlier energy strength kept readings elevated and inflation remains above the 2% target used by most developed-market central banks. It is likely to stay there for some time, as the recent fall in energy prices will take time to feed through. Crucially, wage growth remains controlled, limiting the risk of broader second-round price pressures.
The end of hostilities in the Persian Gulf has reduced inflation expectations, but central banks have maintained a cautious stance. The US Federal Reserve held rates steady while retaining a bias towards further increases. The ECB delivered its first rate rise in 11 months, reflecting ongoing inflation concerns. The Bank of England became less hawkish as inflation undershot expectations and growth softened, while the Bank of Japan continued policy normalisation with a June rate increase.
By quarter-end, investor sentiment had strengthened. Easing geopolitical risks, lower energy prices and a powerful AI-driven earnings cycle supported markets. However, the environment remains complex, with growth increasingly dependent on a narrower set of drivers. The quarter reinforced the importance of diversification and discipline as markets adjust to shifting economic and policy conditions.
