Global equity markets ended May close to all-time highs, up 16% year to date, despite higher yields and continued geopolitical uncertainty. A sustainable peace deal would remove a lingering source of investor anxiety and allow markets to focus more fully on strong earnings fundamentals, illustrated in May by Nvidia’s +85% revenue growth and Dell’s +88%. However, the strong performance of U.S. technology “hyperscalers” has increased concentration risk for many investors. This reinforces the case for a diversified, active allocation across sectors and geographies.
Our Base-Case Scenario Update: The Post-War Economic Context
Our base case remains a gradual de-escalation by the summer. We expect the energy shock to reduce global GDP growth by 0.2 to 0.3 percentage points, bringing growth down from 3.3% to approximately 3.0%–3.1%.
Equities may continue to rise over the medium term as progress in the Middle East allows investors to refocus on solid global economic and corporate fundamentals. The broader backdrop remains supportive, driven by pro-growth government policies and continued investment in AI, energy infrastructure to power AI, electrification, defense, and strategic resources. These themes should continue to support earnings through the rest of 2026. The Fed is now unlikely to deliver further monetary easing in the near term, while the European Central Bank (ECB) is expected to raise rates on June 11th from 2.00% to 2.25%.
Market Movers in 2026 Year to Date
Key Market Drivers in 2026
Key Risks
SystematicEdge has developed a series of investment strategies that give investors a diversified, cost-efficient exposure to Equity, Fixed Income, and Commodities. Our strategies are based on three pillars:
The performance of our flagship strategies in 2025 and 2026 year to date is shown in the table and chart below.
To see the full factsheets for our strategies, please contact insights@systematicedge.com.
Global Economy: Resilient Growth Despite the Oil Shock
The war’s economic impact remains contained, as oil inventories and resilient consumer spending have helped soften the shock. Oil prices are unlikely to return quickly to prewar levels, given damaged Gulf infrastructure and the need to rebuild stockpiles. Global growth has slowed, but reconstruction and rearmament should provide meaningful fiscal support. Central banks are likely to remain cautious, watching for second-round inflation effects while mostly staying on their prewar policy path, with potential delays to rate cuts.
In the U.S.: Growth Holds Near 2% as Inflation Moderates
U.S. growth rebounded to a 2% annualized pace in Q1, supported by stronger private demand, retail sales, and investment. Tax cuts and still-easy financial conditions should help offset higher oil prices, keeping full-year growth near 2%. The Fed remains biased toward easing but is likely to stay patient until core goods inflation clearly moderates and oil prices peak. We expect two rate cuts over the next 12 months as inflation eases, wage growth slows, and services disinflation continues.
In Europe: Energy Shock, Fiscal Support, Hawkish ECB
European growth is expected to slow in the first half of 2026 as the Iran conflict weighs on energy supply and confidence. German fiscal easing, low unemployment, strong household savings, and low corporate leverage should support growth, with GDP expected at 0.8% in 2026. Inflation may rise above 3% near term due to higher energy prices, but the increase should be temporary. Despite this backdrop, the ECB has turned more hawkish and may raise rates by 25bps in June, although we expect that hike to be reversed in 2027 as inflation pressures fade.
In China: Export Momentum and Strategic Stability
Exports rose 15% year over year, driven by AI and green energy products, keeping GDP growth on track with the official 4.5%–5.0% target. The Xi-Trump summit delivered modest agreements on trade, technology, and rare earths, while signalling a shared willingness to maintain dialogue and manage strategic tensions. Inflation remains contained, with CPI at 1% year over year and limited pass-through from higher energy prices.
Global equities rose 6% in May, lifting year-to-date gains above 16%, as reports of a potential U.S.-Iran agreement eased concerns over the Strait of Hormuz. Brent crude fell to USD 87/bbl by month-end, while 10-year U.S. Treasury yields declined from mid-May highs as inflation and Fed tightening fears moderated. Improved Middle East visibility should allow investors to refocus on solid economic and corporate fundamentals. We expect global earnings to continue rising across the U.S., Europe, China, and developed Asia, supporting further medium-term equity upside.
Equity: After nearing record highs last month, global equities performed strongly again in May. In Asia, South Korea’s Kospi 200 was up 35.3% MTD (+121.6% YTD) and Japan’s Nikkei 225 was up 11.9% MTD (+31.8% YTD), while China’s HSCEI moved lower (-2.9% MTD; -5.5% YTD). U.S. equities delivered solid gains, with the S&P 500 (+5.1% MTD; +10.7% YTD) and Nasdaq 100 (+10.5% MTD; +20.1% YTD) both rising. In Europe, the Euro Stoxx 50 recorded a more modest rise (+2.9% MTD; +4.5% YTD).
Fixed Income: 10-year government bond yields showed mixed signals, with the U.S. yield up 7bps MTD to 4.44% (+27bps YTD), while the German yield fell 10bps MTD to 2.94% (+8bps YTD) and China’s 10-year yield declined 3bps MTD to 1.73% (-13bps YTD).
Currencies: The U.S. dollar strengthened this month, supported by stronger-than-expected U.S. economic data. As a result, EUR/USD and AUD/USD fell 0.6% MTD to 1.1659 (-0.7% YTD) and 0.2% MTD to 0.7183 (+7.7% YTD), respectively. At the same time, USD/JPY rose 1.7% MTD to 159.26 (+1.7% YTD), while USD/RMB dropped 1.0% MTD to 6.7630 (-3.0% YTD).
Commodities: WTI oil and gold prices declined, while copper increased. WTI oil fell 16.9% MTD to USD 87.36/bbl (+52.1% YTD), gold declined 1.2% MTD to USD 4,561/oz (+5.4% YTD), while copper rose 7.3% MTD to USD 14,020/mt (+13.0% YTD).
Crypto: Bitcoin, Ether, and Solana all declined this month. Bitcoin fell 3.8% MTD to USD 73,593 (-16.1% YTD), while Ether declined 11.0% MTD to USD 2,016 (-32.3% YTD). Solana also dropped 1.2% MTD to USD 82 (-33.9% YTD).
Global equities advanced 6% in May, pushing year-to-date returns above 16%, as improving prospects for a U.S.-Iran agreement reduced concerns over disruptions in the Strait of Hormuz. Strong AI-linked earnings, including Nvidia’s +85% revenue growth and Dell’s +88%, reinforced resilient demand for AI infrastructure and supported equity momentum. However, the continued outperformance of U.S. technology hyperscalers has increased valuation and concentration risk, reinforcing the need for diversified, active exposure across sectors and geographies.
In the U.S.: Earnings Strength and AI Demand Drive Upside, S&P 500 Up 10.7% YTD
U.S. equities reached new all-time highs, supported by hopes of Middle East de-escalation, strong first-quarter earnings, resilient consumer spending, and continued AI momentum. We are raising our earnings expectations as tax cuts support household income and data center demand drives stronger investment in semiconductors, memory chips, and AI infrastructure. The bull market drivers remain in place, including resilient growth, rising profits, a supportive Fed, and the AI rollout, although investors should expect volatility in high-growth semiconductor stocks. Further upside remains likely, but a durable resumption of energy flows through the Strait of Hormuz is probably needed for the next leg of the rally.
In Europe: AI, Electrification, and Defense Drive Upside, Euro Stoxx 50 Up 4.5% YTD
European equities have recovered from their March lows and now trade within 5% of their year-to-date highs, supported by easing Iran-related risks and a stronger earnings backdrop. First-quarter results showed solid demand across secular growth themes, including AI investment, electrification, automation, and EU defense spending, with Europe potentially delivering 15% earnings growth over the next 12 months. We remain constructive on European equities, as further easing in U.S.-Iran tensions and a normalization of energy flows through the Strait of Hormuz could support additional upside.
In China: China Tech Weakness Creates Medium-Term Opportunity, HSCEI Down 5.5% YTD
We maintain a positive outlook on China equities, supported by strong earnings momentum, attractive valuations, and leadership in technology supply chains and AI innovation. We remain constructive on China technology, as AI investment is rotating rather than slowing, while infrastructure localization and improving chip efficiency support medium-term growth. Beyond technology, we favor power equipment for their earnings visibility and policy alignment, while the Trump-Xi summit delivered constructive rhetoric but no major breakthroughs, broadly in line with expectations.
The U.S. dollar should remain supported near term as Middle East uncertainty, higher energy prices, elevated U.S. yields, and global growth concerns sustain demand. However, further dollar upside may be limited by rising import prices and expectations of policy shifts outside the U.S. With Fed rate cuts largely priced out but rate hikes still unlikely, we expect two Fed cuts over the next 12 months, making disciplined FX hedging critical to protect capital.
EUR/USD at 1.1659: Oil Prices and Policy Divergence Drive the Outlook
Despite higher oil prices and geopolitical uncertainty, EUR/USD has remained range-bound between 1.15 and 1.20, with the dollar supported by U.S. energy exports but capped by potential ECB rate hikes. We expect the conflict to ease and energy prices to normalize after the summer, weakening the dollar as the Fed begins cutting rates while ECB tightening supports the euro. If energy prices remain elevated, however, EUR/USD could decline toward 1.10, reinforcing the importance of active FX hedging.
USD/RMB at 6.7643: Policy Support and Trade Flows Drive Appreciation
We see further downside for USD/RMB as a likely resolution of the Iran conflict could stabilize oil prices, revive Fed rate-cut expectations, and pressure both U.S. yields and the dollar. Traders’ positioning also supports RMB strength, as the current long-dollar speculative exposure could reverse once the Fed signals renewed easing. Calm U.S.-China relations ahead of President Xi’s September U.S. visit, strong trade and repatriation flows, and lower PBoC fixings should support further RMB appreciation, potentially toward 6.30 per dollar by year-end.
USD/JPY at 160: Higher JPY Yields and Fed Cuts Would Support a USD/JPY Sell-off
High oil prices remain a near-term drag on the yen given Japan’s large energy import bill, but narrowing U.S.-Japan yield spreads should become the main driver over the next 12 months. We expect the Fed to cut rates twice, 50bps in total, while the BoJ is expected to raise rates by 75bps, which, along with higher JGB yields, should gradually attract capital back to Japan. As the U.S.-Iran conflict eases and energy flows normalize, we expect the yen to strengthen and USD/JPY to move back toward the 140 support level.
Bank bond spreads were moderately volatile in May but ended slightly tighter, with credit spreads narrowing by 5bps as U.S.-Iran negotiations reduced risk aversion. European banks reported solid results, strong capital positions, an average CET1 ratio of 16%, stable cost-of-risk guidance, and limited private credit exposure, generally below 1% of assets. Japanese megabanks also delivered strong results, with net income up 40% year over year, supported by higher domestic rates and stronger net interest income. We view the recent rise in yields as an opportunity to lock in attractive returns in short- and medium-duration bank bonds.
Commodities continue to offer strong diversification benefits, supported by favorable structural trends. The broader geopolitical and macroeconomic backdrop also remains supportive.
Oil (Brent): +67% YTD to USD 87/bbl, after peaking at USD 120 in March, supported by restricted flows and falling inventories
Restricted flows through the Strait of Hormuz have tightened global oil supply, while demand remains strong relative to available barrels. Observed inventories fell by 246 million barrels in March and April, with cumulative lost production likely reaching 1 billion barrels by the end of May. With Gulf flows still constrained and demand for non-Gulf crude rising, we expect Brent to remain near USD 90/bbl by end-June, with upside risk if disruptions persist.
Gold: Flat YTD to USD 4,500/oz, despite a 30% decline from its January all-time high of USD 5,600, due to liquidation flows and higher global bond yields
Gold has struggled to regain momentum as higher bond yields, shifting central bank expectations, and renewed dollar strength have raised its opportunity cost. ETF inflows and investor positioning have weakened, but central bank buying and structural demand remain resilient. We expect gold demand to reach 1,000 metric tons in 2026, with prices potentially moving toward USD 6,000/oz over the next 12 months, supported by its role as a hedge against currency debasement, fiscal deficits, and economic slowdowns.
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