Bendura Bank: Market Outlook July 2026
Halfway through 2026
The initial half of 2026 was characterized by pronounced market volatility. Geopolitical tensions, including the Iran conflict, shifting monetary policy expectations, and a narrow AI-driven market leadership engendered a complex investment landscape. Despite these headwinds, equities delivered a strong performance, ending the period with one of the best quarters in recent years. The month of June commenced with a stronger-than-expected U.S. employment report, pushing bond yields higher and effectively reducing expectations for rate cuts in 2026. This weighed on technology stocks, particularly semiconductors, as investors took profits following an extended rally.
Attention also turned to the Federal Reserve under its new Chair, Kevin Warsh. While policy rates remained unchanged, the Fed introduced a less transparent communication framework, removing long-standing forward-guidance signals. Although markets largely absorbed the shift, reduced clarity from policymakers may contribute to higher volatility and equity risk premiums going forward. Technology stocks remained the primary driver of market moves throughout the month. The highly anticipated SpaceX IPO initially generated strong enthusiasm but later highlighted the risks associated with elevated valuations. Meanwhile, sharp swings in semiconductor and AI-related stocks reflected growing investor debate around the sustainability of AI-driven earnings growth and capital spending.
While concerns emerged over AI spending returns, competitive pressures, and the rise of lower-cost alternatives, strong results from companies such as Micron demonstrated that demand for advanced computing infrastructure remains robust. Nevertheless, recent market action suggests that investors are becoming more selective, and the AI theme is evolving from a broad market trade into a more differentiated opportunity set.
Looking forward, the summer backdrop appears constructive. Trade policy uncertainty continues to ease, geopolitical risks have moderated, and seasonal factors remain supportive through mid-July. However, with few major catalysts before earnings season begins, markets may enter a temporary information vacuum. Expectations for corporate results are high, particularly within technology, making the upcoming earnings season an important test for both valuations and the durability of the AI investment theme.
Global Economy
USA
Viewed from the start of 2026, the macroeconomic backdrop has become more challenging, although it remains far from a uniformly negative picture. The year began with the Federal Reserve projecting one rate cut in 2026, inflation gradually trending lower despite remaining above target, and signs that the labour market was stabilising. Since then, however, several developments have complicated the outlook. The Iran conflict precipitated a sharp rise in energy prices and renewed inflationary pressures, with headline CPI accelerating to 4.2% year-over-year in May. At the same time, the arrival of a new Fed Chair introduced a somewhat more hawkish policy stance, while labour market momentum softened with monthly job creation moderating from a robust 214,000 in March to 57,000 in June.
These developments have prompted markets to reprice expectations for monetary policy. Goldman Sachs, which had previously anticipated rate cuts beginning in late 2026, has subsequently deferred these expectations further out, reflecting a broader view that the Fed may need to keep policy restrictive for longer to ensure inflation continues to move toward target.
As a result, the outlook has shifted from one of cautious optimism to one requiring greater selectivity and discipline. Inflation remains elevated, policy uncertainty has increased, and growth is showing signs of cooling. While these factors may create periods of market volatility, they also reinforce the importance of focusing on fundamental earnings strength and quality assets. For risk markets, the second half of the year is likely to be shaped by the balance between moderating growth and the prospect that inflation proves more persistent than previously expected.
Europe
June 2026 remained challenging for Europe as the Iran conflict triggered an energy shock that pushed Eurozone headline inflation to 3.2% year-over-year in May, before easing to 2.8% in June as oil prices retreated. In response, the ECB raised its deposit rate by 25 basis points to 2.25%, its first hike in nearly three years. ECB also warned that higher energy costs risked feeding into broader inflation through second-round effects. By month-end, policymakers remained cautious, keeping the door open to further tightening if inflation pressures persist.
Germany remained the weakest of the major economies, with business activity contracting for a third consecutive month and confidence recovering only modestly. France emerged as a resilient outlier, as inflation unexpectedly fell back to the ECB’s 2% target in June, although economic activity continued to weaken. Italy showed greater resilience, remaining marginally in expansion territory despite softer services activity and inflation that remained relatively sticky. Compared with the beginning of the year, Europe’s macroeconomic backdrop has become noticeably less supportive. In January, Eurozone inflation stood at just 1.7%, allowing the ECB to continue its easing cycle. The outbreak of the Iran conflict in March altered this trajectory, driving energy prices higher and forcing a rapid shift in policy. Within months, the ECB transitioned from monetary easing to policy tightening, and markets continue to debate whether additional hikes may be required.
At the same time, growth momentum has weakened. Eurozone business activity slipped into contraction during the spring and remained below the expansion threshold through June. As a result, Europe is facing a more complicated environment characterized by slowing growth alongside renewed inflation pressures. While lower energy prices at the end of June and improving inflation data in France offer reasons for cautious optimism, uncertainty around inflation and ECB policy is likely to remain a key driver of European markets in the second half of 2026.
Asia
Economic data in June highlighted growing divergence within the Chinese economy. While consumer inflation remained subdued, producer prices accelerated sharply, reflecting rising input costs and weaker pricing power among businesses. Domestic demand softened noticeably, with retail sales contracting for the first time since the post-pandemic reopening and investment activity remaining under pressure. At the same time, Beijing continued to pursue fiscal discipline, raising concerns that policy support may prove insufficient to revive consumer spending and sustain growth momentum in the second half of the year.
Japan remained one of Asia’s strongest performers in June. Economic growth continued at a healthy pace, allowing the Bank of Japan to raise interest rates to 1.0%, its highest level in three decades, while signaling that further normalization remains possible. Inflation stayed below the central bank’s target, and the government reinforced its long-term growth strategy by announcing a major investment program focused on artificial intelligence, semiconductors, defense, and space. Together, these developments underscore Japan’s ambition to strengthen its position as a key player in the global technology supply chain while maintaining economic resilience.
From an investment perspective, Asia has remained relatively resilient compared with many Western economies, although the region’s performance has become increasingly uneven. The Iran conflict has been the key macroeconomic development of 2026, pushing energy prices higher, complicating monetary policy decisions, and highlighting important differences in economic strength across the region.
Japan has been one of the region’s standout performers, successfully navigating higher energy costs while maintaining growth and continuing its gradual monetary policy normalization. India has also demonstrated resilience, supported by strong domestic demand, favorable structural trends, and limited pass-through from rising energy prices, although growing fiscal pressures warrant monitoring.
China, however, presents a more mixed picture. While inflation remains subdued, domestic demand has softened considerably since the start of the year. Consumer spending and retail activity have weakened, reflecting ongoing challenges in the household sector and a more restrained fiscal backdrop. As a result, achieving current growth expectations for 2026 may increasingly depend on a meaningful recovery in domestic demand during the second half of the year.
Equities
U.S. equities concluded the second quarter with their strongest performance in six years, despite heightened volatility driven by the Iran conflict, sharp swings in technology stocks, and the highly anticipated SpaceX IPO. The S&P 500 gained 14.9% during the quarter, while the Nasdaq advanced 21.4%, although both indices weakened modestly in June.
A notable development during the month was a significant rotation within the market. Investors shifted away from the Magnificent Seven technology giants and toward semiconductor companies, industrials, and more defensive sectors such as healthcare. Semiconductor stocks were among the strongest performers, benefiting from continued demand linked to AI-related infrastructure spending, while most megacap technology names declined, led by Microsoft, Amazon, and Meta.
This marks a meaningful change in market leadership. For much of the past five years, the Magnificent Seven largely dictated broader market performance. Recently, however, their weakness has not translated into a broad market decline, as gains in other sectors have offset the pressure. Similar patterns have emerged across factor leadership, with value stocks, equal-weight indices, and smaller companies outperforming their traditional growth-oriented counterparts. Several factors appear to be driving this shift. Investors have become increasingly focused on the substantial capital expenditures required to support AI infrastructure, raising questions about future cash flows and the ultimate return on these investments. At the same time, semiconductor companies are seen as direct beneficiaries of this spending cycle, supporting earnings expectations across the sector. Profit-taking after several years of exceptional gains in large-cap technology stocks has likely also contributed to the rotation.
Finally, higher interest rates and increasing uncertainty around the path of monetary policy may be encouraging investors to reduce exposure to long-duration growth assets. While enthusiasm for artificial intelligence remains intact, market leadership is broadening, suggesting a more selective and differentiated investment environment going forward.
European equities finished June mostly higher, with the Stoxx 600 reaching a record high as investors welcomed easing geopolitical tensions and progress toward a US-Iran agreement, raising expectations for a sustained reopening of the Strait of Hormuz. Germany’s DAX underperformed the broader European indices, weighed down by continued weakness in manufacturing, stagnant PMI readings, soft industrial production, and declining factory orders. Investor preference also shifted away from traditional industrial exporters toward AI and infrastructure-related opportunities. At the sector level, Travel & Leisure was among the strongest performers, benefiting from falling oil prices and improving prospects for airlines and tourism companies. Banks also outperformed as lower energy costs supported the economic outlook. In contrast, Oil & Gas stocks retreated as crude prices fell back toward pre-conflict levels, while the Autos sector remained under pressure from Chinese competition, restructuring challenges, and weaker earnings expectations.
China is emerging as a compelling value opportunity within the global AI investment landscape. While AI-related stocks in the U.S. and parts of Asia trade at elevated valuations, many of China’s leading technology companies remain attractively priced despite making significant investments in artificial intelligence. Companies such as Alibaba, Tencent, Baidu, and CATL are expanding their AI capabilities with strong policy support from Beijing, which is seeking to build a more self-sufficient technology ecosystem. Alibaba has integrated its Qwen AI model across its platforms and plans to invest heavily in cloud and AI infrastructure, yet is valued at a modest 17x forward earnings multiple. Similarly, Baidu and Tencent trade at roughly 14x and 13x forward earnings, respectively, well below many global peers.
The key challenge remains China’s domestic economy, where weak consumer demand and slower growth may limit near-term earnings potential. In addition, many Chinese AI companies remain largely focused on their home market, unlike their global U.S. counterparts. Nevertheless, investor positioning remains extremely light. Although China represents roughly 10% of global AI-related market capitalization, global fund managers allocate only around 1.2% of their technology portfolios to Chinese AI equities. This disconnect suggests that if sentiment toward China improves and domestic growth stabilizes, Chinese technology stocks could offer meaningful upside from current valuation levels.
Bonds
Bond markets experienced a volatile June as investors navigated shifting inflation expectations, central bank policy signals, and the fallout from the Iran conflict.
In the United States, Treasury yields advanced early in the month following a stronger-than-expected labor market report, which led investors to reassess the likelihood of further Federal Reserve tightening. The Fed’s June meeting, the first under Chair Kevin Warsh, reinforced a cautious stance toward inflation, with policymakers signaling that additional rate increases remained a possibility. Inflation data also surprised to the upside, as headline CPI accelerated to 4.2% year-over-year, largely driven by higher energy prices. However, sentiment improved toward month-end as oil prices retreated, inflation concerns eased, and softer core inflation data prompted markets to scale back expectations for further rate hikes. As a result, the 10-year Treasury yield finished June broadly unchanged from the start of the month, though still notably higher than at the beginning of the year.
European bond markets were largely driven by the ECB’s decision to raise its deposit rate by 25 basis points to 2.25%, marking its first rate hike in nearly three years. The move reflected concerns that the energy shock stemming from the Iran conflict could lead to broader inflationary pressures. While some policymakers initially signaled openness to additional tightening, falling oil prices and moderating inflation expectations led to a more balanced tone by month-end. German Bund yields rose following the ECB meeting but subsequently retraced their gains as investors reduced expectations for an extended tightening cycle. Consequently, German government bond yields ended June slightly below their levels at the start of the year, reflecting growing confidence that the ECB may not need to tighten policy as aggressively as previously feared.
Commodities & Currencies
Commodity markets were driven primarily by the resolution of the US-Iran conflict and the reopening of the Strait of Hormuz. The geopolitical risk premium that had supported commodity prices since late February dissipated rapidly following the announcement of an interim peace agreement in mid-June. Brent crude fell 23.2% during the month to settle at USD 72.92 per barrel, effectively erasing all gains generated during the conflict. Oil prices remained elevated above USD 90 per barrel in early June as the Strait of Hormuz remained closed and OPEC production hovered near multi-decade lows due to supply disruptions. The sentiment shifted sharply after the United States and Iran agreed to reopen the vital shipping route. As tanker traffic resumed and supply concerns eased, the market rapidly repriced the risk premium that had accumulated over recent months. Additional pressure came from expectations of increased Iranian exports and forecasts from major investment banks pointing to a potential global oil surplus during the second half of the year. Crude oil price experienced a strong swing between the end of February, reaching almost USD 120 per barrel, to falling back to USD 67.04 per barrel in the recent days.
Gold also experienced a significant correction, declining from to USD 5318 per troy ounce to 4380.50 at the end of June. The metal came under pressure from two key factors: the decline in geopolitical uncertainty and a more restrictive monetary-policy outlook. While the Federal Reserve left interest rates unchanged in June, policymakers indicated that further rate increases remained possible, strengthening the US dollar and increasing real yields. This reduced the attractiveness of non-yielding assets such as gold. Although strong central-bank demand and robust Chinese imports continued to provide long-term support, investors largely focused on the removal of safe-haven demand following the US-Iran agreement.
Since the start of 2026, the US dollar has followed a pronounced W-shaped path, initially weakening as markets priced in aggressive Fed rate cuts before recovering on resilient US growth, sticky inflation and reduced easing expectations. After reaching a low in late January, the dollar rebounded strongly through the first quarter, briefly consolidated during April and May, and then surged in June. The June rally was driven by the Fed’s hawkish shift under Chair Kevin Warsh, stronger labour market data and rising inflation, pushing the DXY to its highest level of the year. Overall, the dollar has gained around 2.5% on a trade-weighted basis year-to-date, strengthening notably against both the euro and Swiss franc.
The EUR/USD exchange rate, peaked at around 1.1797 before reversing and falling to approximately 1.1525 at the start of June. This move was driven by stronger U.S. economic data and a shift in interest rate expectations, as markets began to price in a “higher‑for‑longer” Federal Reserve policy stance. Rising Treasury yields and renewed demand for dollar‑denominated assets have supported the greenback, while relatively weaker economic momentum in Europe has added further downward pressure on the euro. We expect the Federal Reserve to pursue a more aggressive tightening path than the ECB, particularly relative to what is currently priced into financial markets. This widening policy divergence should limit any sustained appreciation in EUR/USD above the 1.16 level and, on balance, points to further downside over the coming months and quarters. Our baseline scenario sees EUR/USD gradually declining towards the 1.05–1.10 range, supported by higher US yields and continued dollar strength.
A analogous dynamic manifested in the USD/CHF exchange rate, where the Swiss franc initially remained relatively strong but gradually weakened against the dollar as U.S. yields moved higher. Over the same period, USD/CHF moved towards to 0.80 as the dollar strengthened, reflecting the widening interest rate differential between the U.S. and Switzerland. The Swiss franc remains an attractive hedge against growing concerns over public finances amid rising interest rates. Given Switzerland’s very low level of government debt and minimal fiscal deficits, the currency is well positioned to benefit from these concerns. In addition, the franc continues to serve as a reliable safe‑haven asset during periods of risk aversion, which we expect to persist over the coming months and quarters.
Source: www.bendura.li
Aleksei Andrievskii | Advisory Board Member, Bendura Bank AG | Liechtenstein