Outlook
Investment Perspectives Mid-Year Outlook 2026: Rally vs Reality
7 min read 9 Jul 26
Please see our glossary for information on the financial terms used in this article.
Overview
A new rulebook, or lack thereof
Fabiana Fedeli
CIO Equities, Multi Asset and Sustainability
These are some of the most complex markets Fabiana Fedeli has seen in a while, amid extreme equity price moves, and with different asset classes seemingly following different, often contradicting, drivers. Despite higher energy prices, equities have been strong year to date, outperforming bonds, but performance has been concentrated around the AI theme.
Extreme price moves in equity markets have been a feature this year. AI-related stocks, in particular, have seen extreme price reactions. There are pockets where stocks have reached excessive valuations and areas where we’ve seen, what we consider to be, unwarranted share price falls, says Fedeli.
The dichotomy between perceived AI ‘winners’ or beneficiaries and AI ‘losers’ means there is a significant opportunity for active investors to rotate exposure within the AI theme, which permeates across sectors. Fedeli points to finding attractive opportunities among the software and services companies that have sold off this year amid concerns around the potential impact of AI on their business models. Not all will be winners, but some will be able to successfully integrate AI agents as a feature of their platform, rather than being replaced by them.
While the latest earnings season has been robust, the world could face higher energy prices into 2027, potentially weighing on global demand. Fedeli notes that this risk is yet to be fully priced into equity markets, and warns there’s a risk that optimism is leading to complacency. Rather than running for the exits, however, she points to the need to be selective with investments and to take into consideration the resilience of companies to higher energy prices and a potential demand slowdown.
Despite the potential risks and challenges ahead, Fedeli says this is a good time to be an active investor, with price dislocations creating stock-specific opportunities. She comments, “an active approach allows for a more selective choice of the companies that we believe will be the winners of the structural changes we are witnessing at the moment”. She highlights several structural themes such as infrastructure, the low carbon economy and AI-enabled innovation, that are currently benefiting from capital flows, and she expects will continue to attract future investment.
Meanwhile, Fedeli concludes, “however the rulebook gets re-written, generating alpha in this environment requires a combination of sticking to well-proven investment processes, and adapting to what we believe are structural changes unfolding”. What remains paramount is “fully understanding the growth drivers and exposures of the underlying companies we invest in”.
Global forces, selective opportunities
Andrew Chorlton
CIO, Fixed Income
Positive real (inflation-adjusted) yields mean fixed income (bonds) could once again play a genuine role in portfolios as a source of growth and return, according to Andrew Chorlton. He notes that this is a meaningful shift from the decade of ultra-low interest rates following the financial crisis and underpins the positive outlook for bonds going into the second half of 2026.
However, inflation remains the key complication. The conflict-driven spike in energy prices poses a problem for central bankers; cutting rates too early risks undermining central bank credibility, but the recent memory of 2022’s runaway inflation will be top of mind, possibly leading them to err on the side of caution.
Recent years have shown investors have expected lower interest rates than those delivered by central banks. Chorlton notes “the opportunity therefore lies not in making bold calls on the path of interest rates but in using the dispersion created by divergent central bank paths, fiscal positions and inflation dynamics.” Government bonds remain central to the opportunity set.
Chorlton also points out that in this environment, inflation protection deserves renewed attention, with tools such as inflation-linked bonds, yield curve exposure and credit risk all deserving consideration.
Credit spreads (the additional yield provided by a corporate bond over an equivalent risk-free government bond) remain near historically low levels, meaning the margin for error is limited. However, by remaining invested, we can earn income today, preserve resilience if spreads widen and have the flexibility to add risk when valuations become more attractive.
Other areas of interest are emerging market debt and Asian fixed income. Both offer diversification in an uncertain macro environment, while also providing access to income.
“Fixed income offers a far better starting point than it has for many years, but the opportunity set is complex. Investors need to separate income from credit spread risk, nominal yield from real yield, and broad market exposure from genuine relative value,” Chorlton summarises.
The views expressed in this article should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.
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