Market Sense: The CIO View

Peter Fitzgerald, Scottish Widows Chief Investment Officer, reflects on investment markets in the second quarter of 2026 and shares his outlook for the months ahead.

At a glance​

• Markets stayed resilient: despite geopolitical shocks and inflation worries, many asset classes delivered positive returns.​
• AI remained the dominant investment story: technology companies and AI-related spending continued to support equity markets.​
• Inflation uncertainty did not disappear: energy price volatility reminded investors that inflation risks can return quickly.​
• Diversification is getting harder: traditional equity and bond relationships are less reliable, making broader portfolio construction more important.​
• Income opportunities have improved: higher bond yields have restored fixed income as a more meaningful source of potential income.​

The second quarter of 2026 gave investors plenty to think about. Geopolitical disruption, stubborn inflation concerns and continued excitement around artificial intelligence all contributed to a volatile backdrop. Yet markets proved surprisingly resilient, delivering strong returns despite the noise. For investors, the quarter underlined three important points: markets can look through short-term shocks, AI remains a powerful driver of sentiment and spending, and diversification needs to be more deliberate than ever.​

The biggest macroeconomic event of the quarter was the renewed conflict in the Middle East and the related energy shock. Fears of disruption to oil and gas supplies, particularly through the Strait of Hormuz, pushed oil prices sharply higher early in the period and raised concerns that inflation could pick up again. As tensions eased towards quarter-end, energy prices gave back much of those gains and investor confidence improved. The episode was a useful reminder that global supply chains remain vulnerable and that geopolitical risk is now a central consideration for investors, not a background issue.​

Even with these challenges, the global economy held up better than many expected. Labour markets in developed economies remained relatively strong, consumer spending was broadly stable and corporate earnings continued to beat forecasts. Growth slowed, but it did not stall. Ongoing investment in technology infrastructure, particularly linked to AI, also provided an important source of support.​

Equity markets had a strong quarter, with global equities recording their best quarterly performance since 2020. US technology companies led the way, helped by continued enthusiasm for AI and the infrastructure needed to support it. While the rally broadened a little beyond the largest technology names, market concentration remains a key risk. A relatively small group of companies is still responsible for a large share of global market returns. This is one reason we are considering an allocation to global small cap equities, which may offer a broader set of opportunities beyond today’s dominant market leaders.​

Fixed income markets were more mixed. Government bond yields stayed elevated as central banks tried to balance slower growth with inflation that remains above target. While higher yields can create short-term volatility, they also improve long-term return prospects and make bonds a more attractive source of income again. Within fixed income, investment-grade credit and selected higher-yielding areas continue to look attractive where investors are being paid appropriately for the risks involved.​

Inflation remained one of the biggest uncertainties for investors. Although energy prices moderated later in the quarter, inflation stayed above target in many developed markets. That kept central banks cautious and reduced expectations for rapid interest rate cuts. The message for investors is that interest rates may stay higher for longer, which continues to affect how both shares and bonds are valued.​

Looking ahead, the environment remains broadly constructive, but it is becoming more complex. Equity markets are still supported by optimism around AI, productivity gains and resilient earnings. At the same time, fixed income offers some of the most attractive starting yields in more than a decade. However, investors should not ignore the risks. Valuations are elevated in parts of the market, geopolitical tensions remain unpredictable, inflation could prove sticky and traditional diversification benefits are less reliable than they once were. ​

In this environment, careful portfolio construction and risk management are likely to matter more than trying to make bold calls on market direction. Diversification needs to be broader, more intentional and less dependent on the traditional relationship between equities and bonds.​​​​​​​