Executive Summary
Dear Readers,
Investors who kept their nerve at the end of March were able to benefit from the strong recovery seen in April and May. As a result, the S&P 500, the leading global stock market index, moved from negative into positive territory and reached new all-time highs in May. Following the peace negotiations between the United States and Iran, the price of WTI crude oil has fallen from a peak of USD 117 to below USD 70 by the end of June. This has eased a significant headwind for the global economy.
Alongside hopes for a geopolitical easing of tensions, the key driver of market performance was first-quarter earnings and the positive momentum in earnings growth forecasts for the full year 2026. Beneath the surface, it is becoming increasingly apparent that the Magnificent 7 stocks are losing relative strength, while the broader market continues to advance. Investor demand is gradually shifting away from Nvidia and Broadcom towards other parts of the AI value chain. Companies such as Intel, AMD and Micron Technology have benefited enormously from this trend and have gained significant weight within the major stock market indices. This is particularly evident in the South Korean and Taiwanese stock markets, where Samsung Electronics, SK Hynix and Taiwan Semiconductor Manufacturing Company (TSMC), respectively, have developed into dominant concentration risks.
Driven by the shift in monetary policy expectations, away from further interest rate cuts and towards the possibility of rate hikes, the bond market has undergone a significant change in direction. Rising inflationary pressures have already prompted the European Central Bank and the Bank of Japan to raise interest rates. At its first meeting under the chairmanship of Kevin Warsh, the Federal Open Market Committee has not yet responded. Capital markets are now pricing in the first rate hikes in the United States during the second half of the year. As a result, yields across the US dollar market have moved higher. A two-year US Treasury bond currently yields more than 4%, offering an attractive risk-reward profile.
Gold is also increasingly feeling the impact of the new interest rate environment. Higher interest rates raise the opportunity cost of holding gold, as it generates neither dividends nor interest income. However, demand from central banks is likely to remain strong as they continue to diversify their foreign exchange reserves. Likewise, private investors’ confidence in gold as a safe-haven asset is likely to remain intact despite any temporary headwinds.
As outlined above, we are currently navigating a period of change across multiple areas of the capital markets. These developments reinforce the course we embarked upon at the end of last year. We are diversifying our portfolios even more broadly than before. This applies to investment styles, where we deliberately complement growth stocks with value stocks, to market capitalisation through the addition of small- and mid-cap companies, and to broader stock diversification within our core multi-asset solutions. Gold and targeted currency hedging also remain integral components of our approach to navigating the current market environment.
I hope you enjoy reading this edition.
Yours sincerely,
Maximilian Hefele
Deputy Chief Investment Officer
Compass
The energy price shock has driven up inflation rates worldwide and weighed on the economy in many countries. The peace agreement between the US and Iran is now reducing the downside risks to the economy and the upside risks to inflation, as the oil price has fallen significantly. In our baseline scenario, we (like many other forecasters) had assumed that the military situation would ease by mid-year and that the oil price would fall well below USD 100 per barrel. If the oil price stabilizes at its current level of around USD 70 dollars in the coming weeks, the economy is likely to gradually regain momentum after the setback of recent months.
Central banks have responded differently to the surge in inflation. For example, the ECB raised its key interest rate by 25 basis points in June—just a few days before the peace agreement was announced. The US Federal Reserve (Fed), the Bank of England (BoE), and the Swiss National Bank (SNB) met a week later and kept their key interest rates unchanged. For the SNB, refraining from raising interest rates was the easiest option, as the inflation rate in Switzerland has so far risen only from 0.1% to 0.6%. The SNB is likely to keep its key interest rate at 0%, as the risk of inflation breaking out of the 0–2% target range remains low. Although the ECB, the BoE, and the Fed will continue to face year-over-year inflation rates that are too high for some time, they have the option of pointing to the rapidly declining month-over-month rates—provided the oil price does not rise significantly again. They could refrain from raising interest rates. This applies in particular to the ECB and the BoE, as economic activity is sluggish in their respective currency areas. In the US, by contrast, the economy remains robust and inflation is clearly too high. Following the June meeting—the first under new Fed Chairman Kevin Warsh—there is strong evidence pointing to an interest rate hike in the fall.
The peace agreement between the US and Iran has eased some of the tension in the volatile global situation. It remains to be seen whether the agreement will hold and how the situation in the region will develop. Due to the ongoing war between Russia and Ukraine—including targeted Russian provocations against NATO member states —the geopolitical situation remains tense, especially as further latent risks lurk in the background (including China and Taiwan). Geoeconomics continues to dominate the global landscape.
Macro
Oil Price Sparks Optimism
Overall, the global economy has proven surprisingly resilient since the outbreak of the war, although the economic consequences of the energy price shock are distributed very unevenly. As a result, the economy in the eurozone is under greater pressure than the U.S. economy. Just in time for the end of the first half of the year, the U.S. and Iran reached a peace agreement, causing oil prices to drop sharply and sparking hopes for economic recovery. If the oil price remains well below $90, month-over-month inflation rates will fall rapidly, allowing the ECB to refrain from another interest rate hike, as doing so would further weigh on the already weak economy. Pressure on other central banks to tighten monetary policy would also ease.
Equities
AI Euphoria Boosts Markets in the Second Quarter
Global equity markets performed well overall in the second quarter, driven by ongoing AI euphoria and strong corporate earnings. While US equities and select Asian technology stocks gained significantly, Europe lagged behind due to high energy prices. For the second half of the year, we expect continued volatility, driven by the geopolitical situation, the US midterm elections, and a more cautious Fed policy. We continue to prefer US equities, Brazil to achieve diversification within emerging markets, and a broader market positioning within the US. The equal-weighted S&P 500 as well as small and mid-cap companies are therefore considered suitable portfolio additions.
Bonds
Fixed Income: Inflation Returns – Geopolitical Tensions Drive Markets
The anticipated rise in inflation has materialized and has significantly shaped the rationale of major central banks, whose overall tone has become more restrictive, influencing in particular the short end of the interest rate curve. Over the quarter, the US Treasury yield curve flattened, driven by rising yields in the short- and medium-term segments. In Europe, yields declined slightly across the curve, with exceptions at the very short end. Despite this monetary environment and geopolitical tensions, corporate and emerging market bonds remained remarkably resilient over extended periods and continued to be in demand despite low credit risk premiums. In our positioning, we currently favor high-quality bonds with shorter to medium maturities in order to capture attractive yields to maturity.
Alternative Investments
Gold: A challenging first half, but the structural drivers remain intact
Despite a sharp reversal during the first half of 2026, we continue to view gold as a compelling portfolio allocation. Rising bond yields, a stronger US dollar and reduced safe-haven demand weighed on prices. However, the structural drivers remain intact. Central banks continue to accumulate gold, geopolitical and fiscal risks persist, and reserve diversification has further room to run. Against this backdrop, we believe gold remains an important component of a well-diversified portfolio.
AI Is accelerating convertible bond issuance. Selectivity matters more than ever.
More than 140 years after helping finance America’s railroads, convertible bonds are once again funding transformative infrastructure. Today, they play a central role in financing AI-related investment, from data centers to cloud computing and semiconductors. While issuance has surged, history reminds investors that periods of innovation can also bring excesses. We remain constructive on convertible bonds. However, given more demanding valuations and higher equity sensitivity, we maintain a balanced positioning while placing particular emphasis on risk awareness and careful selection.
Currencies
US dollar strength unlikely to prove sustainable
In the short term, there is a risk that monetary policy will continue to dominate market developments and support the US dollar. In our view, however, expectations of a restrictive US monetary policy are now largely priced into exchange rates, and the recent sharp appreciation of the US dollar appears excessive. Over the longer term, Donald Trump’s unpredictable policies and concerns about rising US government debt are likely to come back into focus. These factors could lead to a further loss of confidence in the US dollar. Against this backdrop, we maintain our forecast that the US dollar is likely to weaken.