In Asia, first quarter 2026 earnings growth was exceptional at around 40% and was one of the strongest quarters in recent years, though heavily concentrated in AI-related names.
After April’s euphoria, markets remained constructive in May as investors continued to price in geopolitical de-escalation. Towards the end of the month, a credible attempt for an agreement between the US and Iran emerged. Negotiations were still ongoing as of month-end, but the chances of bringing the conflict to a close appeared reasonably high.
Oil prices fell sharply, dropping below $100 per barrel, having remained above $110 per barrel for much of the month. How quickly energy markets can return to more “normal” conditions will depend on the time needed to fully restore operations in the Strait of Hormuz.
The prospect of relief from the most acute phase of the energy crisis helped drive fixed income yields lower, following the sharp rise earlier in the month. The Bloomberg Global Aggregate index ended the month with a small gain of 0.3%.
Against this backdrop, central banks may be forced to reassess their next steps and will likely maintain a cautious approach due to the potential for sustained higher oil prices. Even if the conflict were to end rapidly, oil prices are likely to remain above pre-crisis levels for some time, as supply would take months to fully recover and logistical bottlenecks could linger longer.
Macro data pointed to some resilience in the global economy and, so far, the energy shock appears to have inflicted limited damage. The corporate reporting season highlighted strong earnings growth in the US and Asia, alongside positive results in Europe.
Positive fundamentals supported equity markets, which continued to register low volatility, despite the uncertain geopolitical context. Bond market volatility, however, was higher, as rates reacted quickly to shifts in the geopolitical narrative and related inflation expectations.
Equities recorded another positive month. Growth equity returns (+7.0%) continued to beat Value returns (+2.3%). While developed markets continued a positive trend and closed the month higher (+4.6%), emerging markets outperformed other asset classes (+9.7%), led by extraordinary returns for Korea and Taiwan. These equity markets continued to benefit from their positioning in the AI supply chain and hyperscaler-led investment demand.
Commodities ended the month lower (-3.6%), dragged down mainly by energy and precious metals, while the US dollar index rose modestly (+03%).
Equities
The first-quarter earnings season ended in May with clearly positive results.
In the US, earnings grew 30% year-on-year (yoy), driven mainly by the technology sector. Even excluding tech, earnings growth was broad based at around 20%. The S&P 500 rose +5.3% over the month, with technology topping the sector rankings (+15.6%). However, investors have become more selective within the “Magnificent Seven.” Nvidia again stood out, continuing to benefit from strong demand for high-performance semiconductors. By contrast, sentiment toward other names, such as Meta, Google and Microsoft, has been more muted, reflecting uncertainty around the outlook for their AI businesses and questions over returns on very large investment programmes.
In Asia, first-quarter 2026 earnings growth was exceptional at around 40% and was one of the strongest quarters in recent years, though heavily concentrated in technology and semiconductors. Some investors view Asian tech companies as a way to increase exposure to the AI theme at more attractive valuations than US technology leaders. Emerging markets continued their strong momentum (+9.7%) led by Korea (33%) and Taiwan (14%) that both registered yet another exceptional month.
European earnings growth was more moderate (around 5%), but more than 60% of companies beat estimates, which is above the historical average. Euro area macroeconomic data was particularly weak: the composite PMI fell to its lowest level since late 2023, consistent with slower growth. Consumer confidence improved slightly in May but remained below historical averages, suggesting flat consumption. European equity performance reflected Middle East-related risks but rebounded to end the month higher (+4.1%) ahead of an expected agreement to end the conflict.
Japan’s first-quarter GDP growth beat expectations (+2.1% quarter-over-quarter), led mainly by consumption. Exports and public investment were also strong (+5.7%), supported by expansionary policies under the new prime minister. The positive economic data supported Japanese equities, which posted another month of gains (6.2%).
In China, inflation increased in April (+1.2% yoy), driven largely by higher oil prices and other consumer goods, despite falling food prices. However, key cyclical indicators remained disappointing: retail sales continued to weaken, and industrial production posted its sharpest monthly decline in three years. External trade strength appears narrower and more concentrated, and domestic weakness has revived debate about further fiscal support to reduce downside risk to the second-quarter 2026 GDP trend. Against this backdrop the CSI 300 index rose (+3.0%), particularly A-shares, while the MSCI China declined (-2.8%).
Fixed income
Fixed income experienced sharp volatility, reflecting uncertainty over the growth and inflation impact of the Middle East conflict.
CPI data confirmed rising inflationary pressures in the global economy. In the US, April CPI rose 3.8% yoy, beating expectations and marking the fastest annual pace since early 2023. Core CPI rose 2.8% yoy, boosted by a rebound in housing-related components.
In Europe, inflation picked up to 3.0% yoy, driven by energy, particularly motor fuels. Core inflation eased to 2.2% yoy, partly owing to weaker services inflation influenced by the holiday calendar (Easter fell earlier in 2026), which shifted some travel-related inflation from April into March.
In the UK, the outcome of regional elections and a weakening Labour Party increased speculation of political change and fuelled uncertainty around fiscal policy and public debt, adding to volatility. However, Gilts outperformed the global government bond market as UK inflation came in lower than expected and a deteriorating labour market drove yields lower at the end of the month.
Despite the recent improvement in US–Iran negotiations, central banks may remain cautious while awaiting more information on the timing of the Strait of Hormuz reopening and clearer evidence that the decline in oil prices is durable. In this context, the Federal Reserve is expected to stay on hold until the outlook becomes clearer, with the next cut potentially arriving towards the end of 2026 or in 2027.
A European Central Bank (ECB) rate hike in June is now still likely to anchor inflation expectations.
The Bloomberg Global Aggregate bond index closed the month marginally up (0.3%) but following significant intra-month volatility. European bonds posted positive returns thanks to a strong move lower in rates on expectations of an imminent deal in Middle East.
Credit markets were supported by solid corporate fundamentals, which pushed energy-crisis risks into the background. Euro high yield bonds were the pick of the bunch, up 1.0% over the course of the month. Emerging market bond performance was also solid, delivering 0.8% in May.
Conclusion
The prospect of an agreement between the US and Iran, together with expectations of the reopening of the Strait of Hormuz, marks an improvement to the geopolitical backdrop. Attention could now shift to the pace of the peace process. The faster normal transit through the Strait returns, the more contained the economic damage from the energy shock is likely to be.
Normalisation is supportive for both equities and bonds. However, equities have remained notably optimistic throughout the Middle East crisis, underpinned by strong corporate fundamentals, and may have already partially priced in a favourable outcome. Bonds, by contrast, could benefit more meaningfully from easing inflation expectations.
As conditions normalise, some of the themes that dominated at the beginning of the year may come back into focus, including the need for diversification toward markets outside the US (notably Europe and emerging markets) and the view that the US dollar may have exhausted its safe-haven role.
In an environment that remains uncertain, well-diversified portfolios across geographies and asset classes continue to represent the most robust strategy for navigating potential further bouts of volatility.