Why are US stock markets hitting record highs in 2026?

US stocks climbed to record highs in May 2026 driven by strong corporate earnings and continued AI investment momentum. 94% of S&P 500 companies reported Q1 earnings with 84% beating forecasts and earnings growth of 28.4% year on year, the highest since Q4 2021. Amazon, Microsoft, Google and Meta alone are projecting over US$700bn in 2026 capital spending. Optimism around a potential US-Iran deal also supported sentiment.

What does the current market environment mean for UK investors?

For UK investors in Hertfordshire, London and the Home Counties, the disconnect between record equity highs and weakening economic fundamentals matters. Portfolios remain cautiously positioned given elevated US valuations and market concentration, with a modest underweight to equities and slight overweight to bonds. Government bonds are favoured over corporate bonds, with overweight UK exposure and underweight US.

June 2026 Market Update: Markets Climb Despite Middle East Conflict

Q: Why did UK inflation fall to 2.8% in April 2026?

UK inflation dropped to 2.8% in April, down from 3.3% in March, largely due to the government's cap on household energy bills. However, economists have warned price pressures could rise again later in the year. UK retail sales fell 1.3%, unemployment rose to 5% and job vacancies hit a five year low, indicating the Iran war is starting to take its toll on the UK economy.

Q: Will the Federal Reserve cut interest rates in 2026?

A Federal Reserve interest rate cut in 2026 looks increasingly unlikely. US inflation rose to 3.8% in April, its highest level in three years and up half a percentage point from March. Consumer confidence fell to a fresh record low in May and inflation expectations increased. The combination of higher energy costs from the Iran conflict and persistent core inflation is constraining the Fed's ability to ease policy.

Stefan Lubek
1 day ago
4 min read

Rising energy costs are weighing on major economies, even as stock markets continue to reach new highs

Risk appetite remains strong

US stocks climbed to record highs in May despite uncertainty caused by the US-Iran war and elevated oil prices. Global bond yields also rose on concerns that higher energy costs could force central banks to keep interest rates higher for longer, before easing towards month end.

Equities were supported by optimism surrounding a potential peace deal with Iran and growing confidence that artificial intelligence spending will continue to boost corporate earnings. US companies delivered a strong first-quarter earnings season, broadly beating expectations. European and Asian stocks also rallied, buoyed by hopes of peace in the Middle East and continued AI enthusiasm.

However, the broader economic picture is becoming more challenging. The impact of the Iran conflict is beginning to hit the US economy, pushing petrol and diesel prices higher and increasing costs for businesses. US inflation rose to 3.8% in April, its highest level in three years and up half a percentage point from March. This makes a Federal Reserve interest rate cut this year increasingly unlikely.

The effects of the energy shock have yet to feed through to the labour market. US employers added 115,000 jobs in April, while unemployment remained at 4.3%. Consumer confidence fell to a fresh record low in May amid concerns about higher fuel prices, while inflation expectations also increased.

Energy costs begin to bite

UK inflation fell in April, but economists warned price pressures could rise again later in the year. Inflation dropped to 2.8%, down from 3.3% in March, largely due to the government's cap on household energy bills.

The Iran war is starting to take its toll. Retail sales fell by 1.3% as consumers cut spending amid rising energy and fuel costs. Unemployment rose unexpectedly to 5%, while job vacancies fell to their lowest level in five years. There was some positive news after figures showed the UK economy grew by 0.3% in March and 0.6% in the first quarter. Business activity also increased, supported by growth in manufacturing and services.

Pressure builds on China

The fallout from the Iran war is increasing pressure on Chinese manufacturers already grappling with weak demand. Producer prices rose at their fastest pace in more than three years in April, while consumer inflation also accelerated as energy costs increased.

China's export growth rebounded in April as factories stockpiled components amid concerns that the conflict could drive costs higher. While China has so far weathered the fallout, economists believe a prolonged conflict and higher energy prices could weaken demand.

Meanwhile, eurozone economic activity contracted at its fastest rate in more than two years as rising costs put pressure on businesses and households. The services sector posted its weakest performance since 2021, while manufacturing output also lost momentum.

Energy price increases pushed eurozone inflation to 3% in April, well above the European Central Bank's (ECB) 2% target. This leaves the ECB facing the difficult task of tackling inflation without worsening the economic slowdown. As a net importer of energy, the region remains particularly exposed to higher energy prices.

Strong earnings, AI investment and positive investor sentiment continued to support global equity markets.

Market-moving events

Strong earnings support markets. Global equities performed strongly throughout May, building on their April rebound and supported by robust corporate earnings. As of 21 May, 94% of S&P 500 companies had reported their Q1 earnings, with 84% beating consensus forecasts. Even more interestingly, the year-on-year earnings growth rate for the S&P 500 in Q1 was 28.4%, the highest since Q4 2021, according to FactSet.

AI investment surge. AI-exposed companies rallied throughout May, particularly those benefiting from the substantial capital expenditure plans of Amazon, Microsoft, Google and Meta. These four companies alone are projecting more than US$700bn in capital spending for 2026. AI hardware, semiconductor and data-centre supply chains are benefiting from a significant tailwind as a result, while the rally has also begun to extend into AI software as companies start to generate meaningful revenues from these technologies.

Risk appetite returns. Investor sentiment has been bolstered by the highly anticipated SpaceX initial public offering (IPO). The expected market value of more than US$1.5 trillion, which would make it the largest IPO in history, has helped create a strong risk-on environment and fuelled investment in innovative technology companies. The company is due to list on 12 June 2026.

Investment highlights

No portfolio changes. There were no changes to the portfolio, following April’s decision to increase exposure to Japanese bonds and, subsequently, the Japanese yen.

Asset allocation detracts. Tactical asset allocation was broadly negative for the month,

affected by our modest underweight positions in US and Asia-Pacific equities, which performed strongly on the back of robust corporate earnings and continued momentum in the AI space.

Cautious positioning maintained. The portfolio remains cautiously positioned as a result of increased market concentration and valuations that are expensive relative to historical levels, particularly in the US. We are modestly underweight equities and slightly overweight bonds.

Issued by Omnis Investments Limited. This update reflects Omnis and our investment management firms’ views at the time of writing and is subject to change. The document is for informational purposes only and is not investment advice.

We recommend you discuss any investment decisions with your financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given. Past performance should not be considered as a guide to future performance.