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Fast reading
- The US S&P 500 index edged past 7500 this week as investors appear largely unruffled by the conflict in the Middle East, and the risks of the energy shock.
- The European Central Bank (ECB) is grappling with the challenge of rising inflation and weakening growth and could opt to raise rates at its next meeting on 10-11 June.
Global equities have hit new highs in recent weeks, driven by stronger-than-expected earnings, resilient economic data and ongoing enthusiasm around artificial intelligence (AI).
The blue-chip US S&P 500 index edged past 7500 this week as investors appear largely unruffled by the conflict in the Middle East, and the ongoing risks of the energy shock.
One concern has been that the US rally has been led by a handful of tech giants, however, Damian McIntyre, Head of Multi-Asset Solutions Team at Federated Hermes, says there have been clear signs of broader sectoral participation, which could help to sustain gains in the months ahead.
“It has been notable how market leadership has evolved this year,” he says. “At times, different sectors have led the market – for example, technology and growth have performed particularly well – but when you look more broadly across the year to date, returns have been much more balanced, with value stocks and small caps in the US all up by similar amounts,” he says.
Emerging markets (EM) have also posted strong gains, McIntyre adds, benefiting significantly from the enthusiasm around the AI investment cycle.
Earnings growth has been exceptionally strong, well ahead of historical trends
“We believe we’re still in the middle innings of a longer AI-driven investment cycle, which could extend through this year and into next. Earnings growth has been exceptionally strong, well ahead of historical trends, which has been encouraging. It’s a dynamic we expect to persist over at least the next 12 months,” McIntyre adds.
Since announcement of a two-week US-Iran ceasefire on 8 April, the S&P 500 has jumped 12.8%, the Russell 2000 is up 18.5%, and the tech-heavy Nasdaq has increased 19%1.
Figure 1: Equities rally on strong earnings and AI hopes
Energy shock clouds eurozone outlook
European equities, meanwhile, have risen more gently, with the Euro Stoxx 600 up 6.2%2, as the eurozone faces deeper economic challenges from the conflict in the Middle East and the spike in energy prices.
The European Central Bank (ECB) – which is scheduled to meet on 10-11 June – is grappling with the challenge of rising inflation and weakening growth in the eurozone.
“Even if geopolitical tensions were to ease,” says Filippo Alloatti, Head of Financials (Credit), Federated Hermes, “there is a strong likelihood that oil prices will remain structurally elevated, persisting above US$80 per barrel. This would place sustained pressure on both industrial activity and consumer demand, with knock-on effects likely to be felt across the European economy.”
At the same time, the ECB is contending with the legacy of having kept interest rates too low for too long in the aftermath of the Covid-19 pandemic, Alloatti adds.
“The ECB is now under mounting pressure to respond decisively to inflationary pressures and second-round effects and anchoring inflation expectations has become paramount. It all points towards the need for a 25bps rate increase in the near term, potentially as early as the bank’s next meeting in June.”
“Ultimately, the ECB’s credibility is at stake. Any hesitation risks undermining confidence in its ability to maintain price stability, which, once lost, would be difficult to restore,” he adds.
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8 May 2026 – South Korean chip stocks shine amid tech rally
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