Spring Outlook

Review of the past quarter

Markets made strong gains in January and February, however, this was reversed following the US-led attack on Iran. Before US military action began, Japanese markets had reached new highs, helped by expectations of market stimulus from prime minister Sanae Takaichi's big election victory. Emerging markets benefited from a weaker US dollar and more spending of AI technology.

Spring Outlook 2026.pdf

Download PDF • 337KB

US equities lagged as some investors questioned whether the huge investment in AI will pay off, Meanwhile, services companies seen as vulnerable to cheap AI-led alternatives saw their share prices fall. UK and European equities gained as value companies performed well.

Oil and gas prices surged following the US-led attack on Iran, leading to fear of rising inflation and slower global economic growth. Equity markets experienced a broad decline, with US stocks faring better as America is a net oil and gas exporter.

Investors had been expecting interest rate cuts in the US and UK, but government bonds sold off as the prospect of central banks keeping interest rates high if they have to deal with rising inflation triggered by high energy costs as government bonds failed to offer much protection from falling equity markets. Gold also fell in value, as the US dollar appreciated.

Market Outlook

The Middle East conflict is pushing up energy and food prices and disrupting supply chains, but the impact is smaller than the 2022 shock. Higher oil and gas prices and rising food inflation are likely to slow world GDP growth this year, but only slightly. Inflation is expected to rise from its current rate, which remains above target in the UK and US, but this is likely to be far short of the rising to the rate of 8% seen in 2022.

The continued closure of the Strait of Hormuz and the damage done to oil and gas production and export facilities throughout the Gulf region mean the average price of crude oil could remain well above $100 in Q2. But markets still see a relatively quick resolution to the conflict and oil and gas prices are expected to gradually return to normal by 2028. Higher prices and uncertainty will squeeze household spending and investment.

Higher inflation means the European Central Bank is likely to raise rates, but the Bank of England is more likely to hold steady. The Federal Reserve is still likely to cut this summer given softer inflation and labour market concerns.

Financial markets face a difficult environment, but with interest rates and yields already higher than in 2022, bond market turbulence should be more limited. Equity markets will be volatile, but steep falls like those of four years ago seem unlikely.

This post is the opinion of Velarium Wealth and contains a document produced by FE Investments that we feel is relevant at the current time. This document has been prepared for general information only and is not guaranteed to be complete or accurate. It does not contain all of the information which an investor may require in order to make an investment decision.