Space oddity

Bonds, equities, Venus and Mars

Over the past three months, fixed income markets have been focused on the potential negative implications of the Middle East conflict. Higher energy prices threatened to push official inflation rates even further away from central bank targets. 

Central banks themselves became more hawkish, with the European Central Bank raising rates on 11 June. Most recently, US Federal Reserve officials indicated a preference for at least one rate hike this year. In addition, there have been concerns that any hit to growth and incomes could solicit a fiscal response from governments which could lead to even worse debt dynamics.

Equity markets, on the other hand, have largely ignored the conflict. Apart from the end of February’s initial geopolitical shock-driven sell-off, returns have been dominated by the artificial intelligence boom - and returns have been spectacular. 

The Nasdaq index is up 22% since the end of March. The Korean and Taiwanese markets are up by 73% and 44%, respectively. 

There seems no end in sight to the euphoria around AI, driven by tech companies’ huge capital expenditure. But that capex needs funding, and markets appear to be ready and willing to provide it. 

Nvidia tapped the bond markets this week for more than $20 billion. The SpaceX initial public offering represents the mood most vividly, raising $75 billion from investors who saw the market capitalisation rise to almost $3 trillion in the first days of trading. 

Investors are willing to bet on AI’s economics being massively improved by building data centres in space. The late David Bowie might have even penned a song about it!

Relief

Geopolitical tensions have eased. A deal between the US and Iran has been signed and oil prices are more than 30% lower from the peak in early April. A normalisation of energy costs in the months ahead will improve business and consumer confidence. It will also limit the extent to which central banks need to raise rates. 

Even within bond markets, credit has largely ignored geopolitics. Markets have funded a huge amount of technology company issuance and credit spreads have returned to the levels they were at before the latest round of Gulf tensions escalated. 

For example, the spread on a representative US investment-grade index was 80 basis points at the start of the year, having peaked at 94bp in mid-March and is now around 75bp.

That round trip saw credit underperform government bonds in February and March and significantly outperform in April and May (and in June so far). As equity markets made new highs, credit spreads moved tighter, highlighting the confidence that investors have in the business outlook.

Macro positive

And why not? The consensus expectation for 12-month forward earnings per share for the MSCI World Index has increased by 20% in 2026. For the technology-heavy Nasdaq Composite index, the number is 21.4%. 

The economic data has been better than expected. The US has generated over half a million non-farm payroll jobs this year following a fallow period in 2025 when net job creation for the year was just 113,000. 

Purchasing managers’ indices, which regularly take the pulse of manufacturing and service sector activity, show the US manufacturing index above 50 (indicating growth) since January and standing in May at a four-year high. The services sector index shows a similar profile. 

Europe’s data has also been better. Manufacturing activity has been steadily rising since 2023 with the eurozone PMI above 50, although service sector activity has been weaker since the Middle East conflict erupted. 

Companies around the world seem to be benefitting from strong themes such as AI-related capex, increased defence spending, and the advancement of renewable energy and digital infrastructure. Global recession seems as far away as it ever has and suggesting risk assets will continue to perform. 

An easing of inflation and rate expectations will be a further tailwind for credit and equity market returns. 

The fear was that Europe would be worst hit amongst developed economies by the energy shock; could there be an upside surprise to European growth, and relative equity market performance, on the back of lower energy prices?

Expected AI business returns are running high. Geopolitical risks appear to be easing. The cycle appears to be robust. What could possibly go wrong?

For the second half

There will be things to consider for the second half of the year. Will central banks tighten and, if so, will this push yields to levels that may be justified by new ranges for nominal GDP growth in the major economies? New Fed Chair Kevin Warsh promised to revamp how the US central bank goes about its business, but he offered no personal view on rates at his first press conference as Chair on 17 June. The market, however, is leaning towards slightly higher rates. 

Any new adjustment to interest rate levels will hit fixed income returns in the short term and maybe undermine equity valuations. In the UK, the Bank of England continues to hold its benchmark rate at 3.75% but a likely challenge to the leadership of Prime Minister Keir Starmer could re-ignite UK bond market volatility on the back of concerns about the future direction of fiscal policy. A higher base rate cannot be ruled out before year-end, with two members of the BoE’s monetary policy committee voting for a hike on 18 June.

Another topic could be around AI. The lack of tangible profits amongst some of the very highly valued AI companies might force investors to question elevated valuations. 

Something else that is a potential destabilising force for the global economy is the disruption to weather that will result from El Niño - a sustained phase of warmer-than-average sea surface temperatures in the Pacific. 

Scientists are warning that food crops could be affected, while disruptive weather could impact physical assets and communities in some parts of the world. 

Food inflation might be the manifestation of this for financial markets. For all its promised benefits, AI can’t cool ocean temperatures. 

Then there are the US mid-term elections and what the results of those could mean for the remainder of the current Presidential term. Might it mean less policy uncertainty? 

Markets would welcome that after tariffs, fiscal largesse, and geopolitical confrontation. Perhaps the United States’ 251^st year might be a bit calmer.

Performance data/data sources: LSEG Workspace DataStream, ICE Data Services, Bloomberg, BNP Paribas AM, as of 18 June 2026, unless otherwise stated). Past performance should not be seen as a guide to future returns.