July Market Compass: Monthly Talking Points
Key themes behind our current market orientation across equities, bonds and credit.
The Market Compass is designed to give a clear, monthly read on the fundamental backdrop behind our constructive stance on markets. This month’s talking points highlight how easing geopolitical risks, resilient growth and robust earnings are supporting risk assets, even as valuations, positioning and ongoing volatility call for a measured approach across equities, bonds and credit.
July 2026 Talking Points
Equity markets are slightly higher since the end of June with strong earnings and resilient economies offsetting ongoing tensions in the Middle East, higher oil prices and profit-taking in semiconductor-related stocks. Rotation within the market was evident as investors shifted exposure from technology towards sectors such as financials, energy and consumer stocks which outperformed.
Although war-related uncertainty continues, growth remains firm, particularly in the US, while European activity and sentiment indicators have shown signs of improvement. Our base case is that an agreement will ultimately be reached to reopen the Strait of Hormuz, allowing oil flows to resume and easing concerns around both growth and inflation. In this scenario, risks to growth forecasts would likely be skewed to the upside. The earnings backdrop also remains supportive, with ongoing Q2 reporting again delivering positive surprises and prompting further forecast upgrades. Global earnings growth is now expected to reach 31% this year, followed by 15% in 2027 — levels more typically associated with a post-recession recovery than a mid-cycle environment.
Valuations remain above long-term averages, but they now appear more reasonable after falling by 3 points from their October highs. This adjustment, combined with a strong earnings backdrop, has created a more attractive opportunity for investors. Positioning has recovered from the March lows but does not appear stretched, leaving scope for investors to increase exposure as positive fundamentals continue to support markets.
We believe equities have the potential to deliver double-digit gains over the next twelve months, with the ongoing AI theme providing an additional source of support. However, volatility is likely to remain a feature. Disagreements in US-Iran negotiations, uncertainty around inflation, growth and central bank policy, and questions over the pace and scale of AI monetisation may all contribute to periodic profit-taking and short-term market setbacks.
In fixed income, lower expected oil prices, easing inflation concerns and the potential for markets to discount less hawkish central bank policy could support a decline in yields. However, the firmer growth backdrop and the likelihood that inflation remains above pre-war levels may limit the extent of any fall. In corporate credit markets, spreads versus sovereign bonds remain low relative to history, suggesting limited scope for further compression. Overall, fixed income remains attractive from an income perspective and should provide protection in a risk-off environment or if growth disappoints.