Market Drop In - May 2026

China, UK Politics, and the Iran Conflict

Trump's two-day visit to China produced little of concrete value — no breakthrough on Iran, no progress on Taiwan, and no extension of the trade truce due to expire later this year. Agricultural markets disappointed, with soybean futures falling to a two-week low after the summit failed to deliver specific commitments. Most notably, Trump suggested he may ease sanctions on Chinese refineries buying Iranian oil, with a decision expected within days.

Closer to home, Labour's political crisis deepened following May's elections. Over 97 MPs have called on Starmer to resign, and the party lost control of the Welsh Senedd for the first time in a century, with Reform UK taking official opposition status. Reform gained 1,244 councillors and control of 114 councils nationally. The Makerfield by-election on June 18th, where Andy Burnham is the expected Labour candidate, is widely seen as a likely trigger for a leadership bid.

In Iran, the conflict enters its 80th day with talks deadlocked. Iran has submitted a revised peace proposal via Pakistani mediators, but Trump has described the ceasefire as being on "life-support", with the main sticking point being Iran's refusal to discuss its nuclear programme. Brent Crude remains elevated at around $108 a barrel, up from approximately $70 in February before the conflict began, feeding directly into the broader inflationary pressures.

Equity Markets and Earnings Strength

A key focus in equity markets has been how to reconcile ongoing geopolitical tensions in the Middle East with continued strength. The answer lies in corporate earnings. At the start of the year, US Large Cap Q1 earnings growth was expected to be around 15%, but the actual figure came in closer to 28%. Importantly, this strength is no longer confined to technology or AI-related names; it has broadened across financials, consumer discretionary, and industrials. Markets were largely flat to negative until earnings results began to exceed expectations, at which point the strength became too significant to ignore, driving equities to new all-time highs. Current expectations are for earnings growth of around 20% to persist through the remainder of the year.

AI Adoption: Moving Beyond Nvidia

The AI theme has evolved meaningfully. What initially centred on large language model development — primarily benefiting Nvidia — has shifted to conflicted widespread deployment of AI-enabled products, including consumer electronics and, increasingly, automotive applications. This has created bottlenecks in adjacent areas of the supply chain, particularly in memory chips, benefiting companies such as SK Hynix, Samsung, and Micron. Even Intel, previously seen as a laggard, has begun to participate in this momentum. The debate over whether AI can drive tangible profit gains has largely been resolved, with companies already reporting efficiency improvements and workforce reductions as AI takes on tasks previously performed by employees. As a result, firms that have yet to adopt AI are coming under increasing pressure to do so.

Regional Winners and Losers

Performance across regions has been uneven. Korea, Taiwan, and Japan have all delivered strong returns, with Korea standing out as a major beneficiary of AI-related capital flows. In contrast, India has faced headwinds, partly due to its status as a large oil importer, but also because of its exposure to IT services — a sector particularly vulnerable to AI-driven disruption. While the long-term structural story for India, supported by demographics and urbanisation, remains compelling, it is currently less well positioned in the context of the AI-driven investment cycle.

Fixed Income and Diversification Challenges

The role of fixed income within portfolios continues to evolve. Earlier in the year, gilt exposure was removed and duration was reduced across global government bond holdings — decisions that have proven timely. In an inflationary environment, rising inflation expectations can negatively impact both equities and bonds simultaneously, weakening the traditional diversification benefits of fixed income. This dynamic was evident in 2022 following the conflict in Ukraine and has re-emerged more recently. Within fixed income, high yield bonds have been the strongest performers, largely due to their shorter duration profile. However, their correlation with equities limits their effectiveness as a diversifier.

Exploring Diversifiers

In response to uncertainty, there is an increased focus on identifying alternative sources of portfolio resilience. Gold remains part of the allocation, although it has recently behaved more like a risk asset, often rising alongside equities during periods of easing geopolitical tension. Broad commodities offer a more distinct profile, typically performing well during periods of escalation and therefore providing a more effective hedge. Trend-following strategies, which utilise futures across asset classes to capture sustained market movements, have been introduced to client platforms and are under consideration. Additionally, work is underway on long volatility and tail risk strategies, with careful attention to implementation and timing. The overarching approach is proactive, with a clear emphasis on strengthening portfolio resilience in the absence of traditional fixed income diversification.

Broader Macro Context

From a macro perspective, UK political developments have added some volatility, with weaker-than-expected Labour performance in local elections contributing to concerns around fiscal flexibility and putting pressure on gilts. Some of this has since eased following a softer-than-expected inflation print of 2.8%. Meanwhile, President Trump’s visit to China resulted in limited progress on trade, falling short of market expectations and having minimal impact on asset prices. Oil prices remain a key area of focus, as higher input costs could weigh on both consumers and corporates later in the year, although companies have so far demonstrated resilience in maintaining earnings growth despite these pressures.

Fahad Hassan, CIO, Albemarle Street Partners