May 2026 market update - Markets rebound but energy risks linger

Global markets rallied in April, but the Iran conflict and surging oil prices continue to cloud the outlook.

Markets recover as tensions persist.

Global markets recovered in April, with stocks rebounding from March’s losses. US equities climbed to fresh highs, supported by strong earnings and AI-driven growth, while the FTSE 100 regained ground. European and Asian markets also moved higher.

Central banks are facing a more complex backdrop as the US–Iran war adds to inflationary pressures and uncertainty around growth. Optimism briefly improved following a two-week ceasefire, but negotiations have since stalled.

Disruption in the Strait of Hormuz has persisted, keeping oil prices volatile. Crude rose above $126 a barrel at one point, the highest since 2022, after President Donald Trump warned the US blockade of Iranian ports could last for months.

Fed keeps rates on hold.

The US Federal Reserve (Fed) held interest rates for a third consecutive meeting as inflation rose and uncertainty increased. US inflation jumped from 2.4% in February to 3.3% in March, driven largely by higher energy prices.

The increase is the largest in nearly two years, echoing the inflation shock seen after the invasion of Ukraine. Consumer sentiment has fallen to a record low as households react to rising costs. Gasoline prices have climbed above $4 a gallon, raising concerns about weaker consumer spending.

Despite this, the labour market remained resilient. Employers added 178,000 jobs in March, while unemployment edged down to 4.3%.

UK inflation rises.

The Bank of England held interest rates at 3.75% in April despite rising price pressures. UK inflation increased to 3.3% in the year to March, up from 3% the previous month, driven largely by higher fuel costs.

Rising prices and economic uncertainty have pushed consumer confidence to a two-year low. The UK’s reliance on imported gas leaves it exposed to energy shocks, with inflation expected to remain elevated over the short to medium term.

The labour market showed mixed signals. Unemployment fell to 4.9%, while regular pay growth slowed to 3.6%, which is its weakest level since late 2020.

China’s growth rebounds.

China’s economy grew 5% year-onyear in the first quarter, showing resilience despite disruption from the Iran conflict. Industrial output rose 5.7% in March and retail sales increased 1.7%.

The economy has so far absorbed the shock, supported by large oil reserves and renewable energy. But growth is expected to slow later in 2026, with inflation beginning to rise as energy costs feed through.

In Europe, the European Central Bank (ECB) kept rates on hold at 2% for a third meeting. Eurozone inflation rose sharply to 2.6% in March from 1.9% in February, driven by higher energy prices.

Private sector output weakened, with activity slipping and demand softening. Manufacturing held up better, but falling confidence and rising costs have increased concerns about stagflation.

Market-moving events

Middle East tensions persist. A ceasefire is in place, but the Strait of Hormuz remains closed, keeping upward pressures on the prices of oil, gas and key raw materials used in fertiliser, metals and semiconductor production. These supply constraints are likely to persist and could continue to influence markets in the months ahead.

Central banks hold steady. Economic data was mixed and uncertainty remains high. Major central banks left rates unchanged while highlighting inflation risks. The Bank of England outlined scenarios suggesting further rate hikes this year, followed by cuts later in the cycle, underscoring the difficult policy trade-off.

Equities diverge. Despite elevated oil prices, equities rallied over the month, led by the US as earnings came into focus. Mega-cap technology results beat expectations, though market reactions were mixed, with Meta in particular falling after raising capital expenditure guidance

Investment highlights

Increased short-dated bonds. During the month, we reduced exposure to both UK and European equities, removing our tactical overweight in both regions. We added exposure to short-dated bonds as a further defensive tilt, with a view to protecting investor capital from any future equity market volatility. In agility, proceeds were reallocated to short-dated Japanese government bonds, reflecting more attractive valuations and aiming to benefit from a strengthening Japanese yen.

Tactical positioning detracted over the month. Our underweight exposure to global equities, particularly the US market, had a negative impact relative to the Strategic Asset Allocation. Markets rallied strongly as investors priced in a short conflict in the Middle East and continued resilience in corporate earnings.

Remain cautiously positioned. Portfolios remain modestly underweight equities, with a particular focus on US equities, and overweight bonds. This reflects ongoing concerns around elevated equity valuations and the risk that any escalation in the Middle East could begin to weigh on economic growth.

Issued by Omnis Investments, which is authorised and regulated by the Financial Conduct Authority. Registered address: Auckland House, Lydiard Fields, Swindon SN5 8UB. This update reflects our view 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 Investments 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