Monthly Market Commentary - August 2026

Global stock markets drifted lower in July, with the MSCI AC World Index declining 1.5%. Still, a solid first half of the year means the benchmark ended July up 11.5% year-to-date (returns total and in sterling, unless otherwise stated). A combination of the resumption of Middle Eastern hostilities and concerns around fiscal and monetary policies on both sides of the Atlantic were central themes which weighed on stocks and also bond markets — gilts returned -1.7% in July.

High-flying tech stocks feel gravity

A closer look at regional performance reveals that some cooling of the hottest parts of the AI trade was perhaps more responsible for the negative month for global stocks than developments in the Middle East. South Korea’s Kospi index — which has more than half its weighting in two memory-chip makers, Samsung Electronics and SK Hynix — posted its worst monthly return since 2008, falling more than 20% in July. Even after the fall, the Kospi was up close to 30% YTD.

This bears out in markets closer to home too, with the MSCI North America (-1.5%) faring worse than the MSCI Europe ex UK (-0.7%). Given that the MSCI North America has a far greater tech weighting than the MSCI Europe ex UK (36.1% vs 10.9%) and energy weightings are similar (3.7% vs 3.1%) this suggests that the difference is reflective of the tech influence outweighing energy. UK stocks benefit on both sides of this, boosting the MSCI UK by 3.9% in July. An 11.5% energy weighting benefitted from rising oil prices while tech accounts for just 0.9% of the index.

US earnings walking the walk

Second quarter earnings season has been strong, with around two-thirds of companies on US large-cap benchmarks reporting by the end of July. 86% of these delivered positive earnings surprises, while 77% reported better-than-expected revenues, according to FactSet. Quite incredibly, this equates to an expected 47% YoY earnings growth rate, which if achieved would be the highest since the pandemic recovery in 2021. It should be noted that almost half of this is coming from growth attributable to Apple and Amazon, that has been listed as “other income” relating to equity investments. Still, with this excluded the growth rate would be around 26% and still the fastest pace of growth in five years.

Diversification reduces volatility

From a year-to-date perspective there has not been a wide divergence in regional equity returns, with the MSCI AC World (+11.5%), MSCI UK (+11.8%), MSCI Europe ex UK (+9.7%) and MSCI North America (+9.9%) all delivering broadly similar performance. However, as July’s returns show, there has been sizeable divergence month on month. UK stocks outperformed in the first quarter of the year while US equities were the standout performer in Q2. While overall returns may be fairly similar year-to-
date, a diversified portfolio would have experienced significantly less volatility on a monthly basis due to the low, sometimes negative, correlation between the markets so far in 2026.

Gilts more sensitive to international factors for now

UK bond markets have been relatively benign in their response to Andy Burnham’s start as UK Prime Minister and appear more sensitive to events in the Middle East and Washington for now. Short-dated bonds fared better, returning -0.2% on the month compared to a -3.6% return for gilts 15yr+. John Healey’s appointment as chancellor has been welcomed by investors as a safe pair of hands. Shabana Mahmood was deemed the favourite, but Healey brings Treasury experience and is a sign that Burnham will respect the bond markets as a check on his radicalism, rather than plough ahead with significant changes that could unsettle the fiscal position. This is important after his comments on the flexibility available within the fiscal rules.

Without a change to the fiscal rules, which in itself would be a difficult sell to markets, the options are limited for Burnham and Healey. Spending cuts are unlikely to feature in a Burnham premiership, which means tax rises will be back on the table for the Budget, scheduled 28 October. We have seen the damage such speculation and policy can have on business confidence and thus the UK economy, so that period will need to be carefully managed. Burnham is in his honeymoon period for now, but by the Autumn he may just find the problems that brought down Keir Starmer have failed to disappear.

Bank of England keeps rates unchanged

Despite increasing noise that rate rises are around the corner, the Bank of England chose to maintain its policy rate at 3.75% at its July meeting. With three members voting for an increase in July and energy prices continuing to exhibit volatility it is not surprising that derivatives markets are pricing in at least one interest rate rise before year end.

The new government has made the cost of living its number one priority and initial announcements will help lower inflation marginally, but not by enough to really make a difference with interest rates. Inflation remains uncomfortably above target, with the latest figure registering 2.6% in June, and given the 13% rise in the energy price cap is now in effect, that figure is likely to rise once again in the coming months.

Fed uncertainty grows

The July meeting of the Federal Reserve caused a significant market reaction, with long-dated US Treasury yields posting their largest one-day jump since Donald Trump’s “liberation day” tariff announcement and hitting a 19-year high. Meanwhile US stocks fell 2% to hit their lowest level in over a month. The reaction was not due to any change in policy, with the Fed Funds rate kept unchanged in the 3.5%-3.75% range, or anything in particular that chair Warsh said during his press conference.

Rather, it appears it was what was not said that caused the reaction. In a break from his predecessors, Warsh says that he will avoid forward guidance, the practice of explaining the rate-setting committee’s expectations of future interest rates. He has previously said this, but it seems that the market finally took notice after the Fed decision. What this means in effect is that there’s greater uncertainty around future interest rates, and this uncertainty rises the further into the future we look e.g. 30-year yields are far less certain than 2-year yields. Going forward this is something we will be watching closely and is potentially suggestive of greater volatility around central bank decisions and economic data releases.

Conclusion

Stocks pulled back a little in July, but the final declines were modest and have already been recouped in the first few days of August thanks to positive noises coming out of the Middle East. That said, overall stocks and bonds have begun to display a diminishing sensitivity to events in the Middle East and are being driven more by other factors, including strong earnings growth and resilient economic data. Sentiment around the AI trade remains a big theme and after being firmly checked last month, culminating in the panic sale of tech holdings from a previously high-flying hedge fund (Situational Awareness), a semblance of stability has returned.

In the UK bond market investors are closely watching the new government but for now they are giving them the benefit of the doubt when it comes to fiscal prudence. Additional spending is expected but this is expected to come from higher taxes. In the US, economic data and the next Fed meeting could be increasingly important as market participants continue to try and get a read on how Kevin Warsh will lead the central bank in setting monetary policy.

Overall, despite a high number of headline risks, thus far 2026 is shaping up to be another rewarding one for investors — particularly those holding diversified portfolios. Risks remain, with the balance potentially shifting back a little more to the AI trade and away from Middle Eastern developments. Rate increases are expected in the coming months, but the Bank of England continues to navigate a tricky path between above target inflation and an economy not firing on all cylinders.