Market drop-in - July 2026

Headlines

The brief pause following the signing of the Memorandum of Understanding has ended, with US and Israeli military action against Iran resuming. This has disrupted oil flows through the Strait of Hormuz, pushing Brent crude back above $90 and touching $100 today. These developments have reset some of the optimism seen in the back half of Q2 and have broader implications for commodity and financial markets that we are monitoring closely.

On a more positive note, inflation prints in both the US and UK came in better than expected, largely driven by the prior fall in oil prices. However, with oil now rising again, the direction of inflation for the remainder of the year is less certain, which has direct implications for fixed income and asset allocation more broadly. US earnings season has started strongly. Goldman Sachs, Citigroup, and Bank of America have all posted solid results, with defaults remaining very low and the broader US credit environment remaining healthy.

Equity markets

Year-to-date equity returns remain robust given the backdrop of renewed Middle East tensions and some unwinding of the AI trade. The S&P should be on track for returns in the high teens for the year, well above long-term averages, though below the 20–25% years investors have grown accustomed to recently. US small caps have been notably resilient, supported by the strength of the US economy and the earnings picture. The key driver underpinning equity markets remains earnings growth, not macro headlines. Earnings growth of around 27% was recorded for US large caps in Q1, with north of 20% anticipated through Q2, Q3, and Q4. Importantly, this strength is broadening out, Europe, the UK, Asia, and Japan are all participating. Japan and Europe have been more sensitive to the oil price move and have seen weaker returns over the past month. Asian equities have also been impacted, partly due to the pullback in semiconductor and memory stocks.

Fixed income

The right positioning continues to be short duration and credit. Duration has been hit again as interest rate expectations have risen, with gilts down around 1% on the month and flat for the year. Short-dated bonds and index-linked securities have fared better, returning around 2% year-to-date, which is a solid result for a defensive asset class. Fixed income is struggling to provide its traditional diversification benefit. Steps have been taken to reduce duration within the bond book and to increase flexibility through active fund allocations, positioning us to lean into any credit spread widening should it materialise.

Global convertibles have been a notable underperformer, down 6.4% over the month, a reflection of the equity sensitivity of names like SK Hynix, which had moved deep in-the-money. We have no exposure here. Cash is performing well in the current high-yield environment. However, it lags high yield and is only slightly ahead of short-duration debt, and given the opportunity of holding cash, staying invested in capital markets makes more sense than being liquid.

Inflation outlook

UK CPI fell to 2.6%, though the Bank of England remains in a tighter spot than the Fed. The high services component of UK inflation, driven largely by electricity prices, means the benefits of lower oil prices are slower to feed through than in the US. Rate cut expectations in the UK have been revised down from two cuts to closer to one for the back half of the year. We do not anticipate any significant easing from the Bank of England in the near term, though the underlying UK economy continues to show pockets of strength in GDP and PMI data. An additional inflation consideration is the impact of the Super El Niño weather pattern on agricultural commodity prices, particularly cocoa, sugar, and coffee. Combined with higher fertiliser costs stemming from Gulf tensions, this could sustain upward pressure on food prices over the medium term. We have exposure to broad commodities through our multi-asset funds (Prima).

The Fed and communication

New Fed Chair Walsh has adopted a more hawkish tone than markets had anticipated, though the recent fall in US inflation gives him some breathing room. His decision not to submit a dot plot is notable and may signal a broader shift away from forward guidance as a communication tool. Markets will need to pay closer attention to individual Fed governor commentary rather than relying on published rate forecasts. This introduces some uncertainty but also gives the Fed greater flexibility. The underlying direction of travel, should inflation continue to fall, remains toward lower rates over time.

AI and technology

Memory stocks (Micron, SK Hynix, Samsung) have pulled back meaningfully after extraordinary runs. SK Hynix went from a $100bn to over $1 trillion market cap, and stocks are now struggling to make further headway despite strong fundamentals, which is itself a signal worth heeding. Several factors are converging profit-taking driven by Middle East tensions, stretched valuations for stocks that typically trade cheaply, and the emergence of cheaper Chinese AI models (most recently Moonshot) competing at the frontier. This has raised questions about the ceiling on enterprise AI pricing, directly relevant ahead of the anticipated Anthropic IPO and OpenAI's delayed listing.

IBM's 25% single-day drop was a stark reminder that AI spending is cannibalising other IT budgets. Enterprise technology spending is not unlimited, and as more of it flows toward AI tokens, traditional software and infrastructure players (Salesforce, Intuit, Adobe, IBM) face headwinds. Oracle has retraced its entire AI-driven run-up. The key takeaway is that the "rising tide lifts all boats" dynamic of the past 6–12 months is likely behind us. Stock selection matters more now — the risk is concentrated in names swept up in the AI fervour rather than those with genuine earnings underpinning their valuations.

Positioning

We are well diversified across US, European, Asian, Japanese, and UK equities. Exposure to high-octane memory names within our US value sleeve has been fully exited, and the timing of that exit was favourable. Our US equity exposure sits primarily in the broader MAG7, which has lagged some of the more speculative AI names, this reflects asset weight rather than concentrated bets. We remain constructive on equities overall, underpinned by the earnings picture, while being selective and circumspect about names driven by sentiment rather than fundamentals.

Fahad Hassan, CIO, Albemarle Street Partners

Frank Talbot, Head of Investment Research, Albemarle Street Partners

Sources: Trading Economics, Factset, Bloomberg, WisdomTree, Artificial Analysis, data to 20/07/2026