Seeing through the fog

At the end of May, the sun in Northwest Europe rises roughly between half past five and six in the morning. For early birds, that is an excellent time to get in the car and drive to the forest for a morning walk. The roads are still quiet, traffic lights immediately turn green, and on clear days the rising sun offers a beautiful play of colours in red, pink, orange, and purple. But closer to the ground, the picture is often different. Especially during those early morning hours, after a night in which the earth’s surface has cooled significantly, you have to take fog into account. These ‘clouds on the ground’ can seriously obstruct visibility on the road.

Something similar applies to financial markets. We are writing this Mid-year Investment Outlook in a year that, so far, has been marked by heightened geopolitical tensions. The Iran war has caused a great deal of human suffering in the Middle East in recent months – and a lot of uncertainty in the rest of the world. That uncertainty has also left its mark on financial markets. Equity prices were volatile, bond prices fell, and yields rose. In commodity markets, sharp fluctuations in oil prices stood out in particular; overall, oil prices have risen sharply since the outbreak of the war.

Nevertheless, many equity markets have recovered strongly from the sharp declines that followed the outbreak of the conflict. In fact, in the US, the S&P 500 Index and the Nasdaq have reached new record highs. It is therefore no surprise that many investors are wondering whether market sentiment is consistent with the fragile geopolitical situation.

It is, however, not that strange that equity prices are out of step with the current geopolitical turmoil. Financial markets primarily look ahead: instead of focusing only on the here and now, expectations for the coming months are priced in. In this Investment Outlook for the second half of 2026, we adopt a similar approach. We try, as it were, to ‘see through the fog.’

Seeing through the fog means that we have to make assumptions. In doing so, we look, among other things, at our economic scenarios. In these scenarios, oil price developments play an important role. Since the start of the conflict, oil prices have risen due to fears of supply disruptions. The Strait of Hormuz is a key bottleneck in this respect. Damage to energy infrastructure in the Gulf region could also keep oil prices elevated. Higher oil prices lead to higher inflation. At the end of March, we therefore raised our inflation expectations and slightly lowered our economic growth forecasts.

Even so, we assume that the energy price shock will have more impact on inflation than on growth. In our base case scenario, we expect the economy to continue growing at a healthy pace. The European economy benefits from investments that governments – with Germany taking the lead – are making in infrastructure and defence.

In addition, massive investments in AI continue unabated, particularly in the US. This has a strong stimulating effect on the US economy. Meanwhile, the midterm elections (November) are drawing closer. During these ‘midterms,’ the Republican Party could lose its current majority in the House of Representatives and the Senate. To prevent this, the Trump administration may implement fiscal stimulus measures to appease voters. These stimuli could also boost US growth.

Meanwhile, emerging markets, such as Taiwan, benefit from strong (foreign) demand for semiconductor chips and chip components. Thriving exports support growth in emerging economies.

Moreover, companies are doing well, with profit margins at record levels in both Europe and the US. Over the next twelve months, we expect double-digit earnings growth in all major economic regions. Overall, the outlook for both growth and corporate profits is therefore positive. That said, we cannot ignore the risks. Geopolitical uncertainty means that our base case scenario has become more uncertain as well. Against this backdrop, we are seeking a balance between investment opportunities and risks.

After the strong rally in April, we reduced some risk exposure to equities (neutral). We are waiting for the fog to lift somewhat before taking a more decisive stance on equities. At a regional level, we prefer equities from emerging markets over those from developed markets. Within developed markets, we are more positive about US equities than their European counterparts.

At the sector level, we are positive about industrials. The industrial sector benefits from the large-scale defence and infrastructure investments being made by governments. We also see opportunities in the information technology (IT) sector, in which we again took an overweight position at the end of April. The IT sector, and particularly the semiconductor subsegment, continues to benefit from the rise of AI.

Our view on bonds is neutral. However, due to the recent rise in yields, this asset class has become more attractive. We see opportunities especially in high-quality bonds, which offer more attractive returns than interest on savings accounts.

For diversification purposes, we maintain a position in gold. Structural factors, such as ongoing geopolitical uncertainty, could provide support for gold prices over the longer term. Would you like to know more about the opportunities we see for the second half of this year? Read the article Opportunities.

The biggest risk is a renewed escalation of the conflict between the US/Israel and Iran – and/or the failure to reach a peace deal. Although tensions appear to be easing, we cannot rule out the possibility that the conflict flares up again or that disruptions to energy supplies last longer than we currently expect. In that case, inflation could rise further, potentially fuelled by second-round effects. Higher inflation can lead to higher interest rates, which is unfavourable for bonds.

The advance of AI also entails risks. The benefits of the technology may fall short of the high expectations. Progress in AI could also stall, meaning that the massive investments currently being made may ultimately deliver insufficient returns.

Would you like to know more about the investment risks we see in the period ahead? Read the article Challenges.

We return to the foggy spring morning with which we began this article. When the sun rises higher, the earth’s surface warms up and the fog lifts. We cannot predict whether geopolitical tensions will also be resolved in the coming months. What we do know is that the economic and corporate ‘weather forecasts’ are favourable.

Against this background, our recommendation to investors is to adopt a balanced approach. A neutral allocation to both equities and bonds offers a good balance between opportunities and risks. To further diversify portfolios, a position in gold may be attractive. Overall, we see ample reason to see through the fog – and not to approach the second half of this investment year too negatively.