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World Economic and Market Outlook - July 2026


The second quarter began amid fears that conflict in the Middle East would trigger a major energy supply shock, driving both inflation and weaker economic growth. Such supply-side shocks are particularly difficult for central banks to manage, as they must balance controlling inflation against supporting growth. However, the anticipated surge in oil prices failed to materialise. Brent crude has since fallen back well below $100 per barrel, reducing inflationary pressures and improving the outlook for global growth, particularly for energy-importing economies. This also lessens the need for further aggressive monetary tightening.


While geopolitical risks remain, particularly given the tentative nature of the Memorandum of Understanding between the United States and Iran and ongoing tensions involving Israel, markets have become increasingly focused on economic fundamentals rather than geopolitical uncertainty.



AI investment continues to drive growth

The principal support for global growth continues to be the AI capital expenditure cycle centred in the United States. Heavy investment by hyperscale technology companies is underpinning strong corporate earnings expectations, with S&P 500 earnings forecast to grow by more than 20% in 2026. The benefits extend beyond technology into companies supplying infrastructure and data centre construction. Although investor positioning around AI has become increasingly crowded, creating episodes of sharp market volatility, recent results from Micron reinforced confidence that earnings growth across the semiconductor sector remains robust.


Interest rates and monetary policy

Interest rate expectations have shifted significantly during the year. Markets initially anticipated modest US rate cuts, but persistent inflation, higher energy prices earlier in the year and the appointment of Kevin Warsh as Federal Reserve Chair have led investors to price in a possible rate increase instead. Warsh has adopted a firmly anti-inflation stance, strengthening the US dollar and reducing concerns over currency debasement. Equity markets can continue to perform well alongside gradual rate increases if earnings growth remains strong, although materially higher bond yields would present a challenge to current valuations.

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