Last month’s highlights
- The best monthly performance for US shares since 2020
- Upbeat earnings and intact AI investment thesis supported sentiment
- Investors continue to look through the energy and associated costs of the Iran war
Stock Take
Tech drives US shares to new highs
The S&P 500 and Nasdaq ended the week at record highs. Despite a spike in energy prices, market sentiment remained upbeat, supported by a strong corporate earnings season and positive AI newsflow.
With reporting season nearly over, the four key US-based cloud operators Microsoft Azure, Amazon Web Services/AWS, Google Cloud and Meta (known as hyperscalers), all reported strong double-digit revenue growth, reflecting strong end-user demand and a payoff for the high spending already undertaken.
This is encouraging these companies, which account for almost 20% of the S&P 500’s weighting, to raise their already aggressive spending plans. Ahead of first quarter 2026 results, they were forecast to spend just over $650 billion on capital expenditure in 2026. Cumulatively, this figure is now set to be over $700 billion. The week ended with Apple also reporting strong earnings.
So far this quarter, US companies have reported annual earnings growth of almost 30%, more than four times the mid-single digit average growth recorded over the past five years.
Investor confidence outmuscles higher oil price
Brent crude reached a four-year high of $126 per barrel mid-week before falling back and finishing the week at just under $110 a barrel. The price spike reflected reports that the US was considering further attacks on Iran to break the political and military stalemate. By comparison, the price at the beginning of the year was $61 per barrel, and on the eve of war it was $73 per barrel.
As long as the Strait of Hormuz remains closed to tankers, the deficit between global energy usage and global supply will increase. While global inventory levels currently provide a buffer against this energy imbalance, many analysts believe May will prove crucial in whether the oil price remains above $100 per barrel for the foreseeable future.
Only a few sectors, such as transportation (and airlines in particular), report being severely affected by the costs of higher energy. In contrast, current drivers of market sentiment, such as AI and tech, appear little affected. These limited effects have helped an easing in equity market volatility. Despite relatively high energy prices, the low stock market volatility could be suggesting investors think the worst of the conflict is over. Markets may be signalling they do not expect relations between the parties to deteriorate further.
Are central banks set to spoil the party?
The US Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) all held meetings last week to decide whether to make any changes to interest rates. All kept rates unchanged in moves which were expected by investors. Despite the holiday shortened week across Europe, the mood music for both the ECB and BoE was hawkish and many investors expect both central banks to raise rates to deal with the risks to inflation and growth resulting from the Iran war.
The risks of stagflation (low economic growth and high inflation) are evident in Europe, where economic growth of only 0.1% quarter-on-quarter in January to March (below expectations) contrasted with an annual inflation rate rising from 2.6% to 3.0% between March and April. Barring a quick and complete resolution to the Middle East war in the next few weeks, investors think it likely the ECB will raise interest rates by 0.5% at its next meeting on 11 June.
The UK’s vulnerability to energy inflation is likely to worsen prospects for its already weak growth outlook. This week’s local government elections are expected to be further bad news for the government. This highlighted risk profile has resulted in UK gilts offering the highest bond yields among the G7 group of advanced economies.
With one member of the BoE’s interest rate setting committee voting for a hike last week, investors expect rates will rise when the Bank next votes on the matter on 18 June. Greg Venezilos, SJP’s fixed income strategist commented “in the current environment, it’s good to have a dissenter – it shows that the bank is watchful and alert to the threat of higher inflation. This willingness to hike rates sends a reassuring message to investors”.
Warsh one big step closer to becoming next Fed chair
The key news for the Fed was less its decision to hold interest rates but more the Senate banking committee’s approval for the nomination of Kevin Warsh as the new Fed chair. His nomination will likely progress to a vote by the full Senate next week. Against the backdrop of President Trump’s desire for the Fed to cut interest rates, investors are uncertain what Warsh being in charge of the central bank will mean. He has flagged that he would prefer less frequent transmitting of Fed thinking on rates to markets. A further concern will be the level to which Warsh will be resistant to political pressure.
Wealth Check
Pension Schemes Bill receives royal assent after months of wrangling
After months of debate between the Lords and Commons, the Pension Schemes Bill received royal assent last week.
The breakthrough came after the Lords agreed a scaled back version of the mandation powers, which had been a major point of contention. These powers allow the government to influence how pension schemes can invest savers’ money.
Under the new law and following concessions made by the Commons, the House of Lords was satisfied that the mandation powers will now have the appropriate safeguards in place.
The pensions industry has welcomed the Pension Schemes Act 2026. The Act will bring major reform of the UK pensions system, requiring schemes to prove they are delivering value for money for pension savers.
Other measures in the Act include:
- A Value for Money framework, which protects savers from being stuck in underperforming schemes. It will also standardise how value is assessed, making schemes easier to compare and more transparent
- Allowing small pension pots to be automatically combined
- Reducing costs and increasing choice by creating larger defined contribution ‘mega funds’ of at least £25 billion.
Renters’ Rights Act comes into force
The Renters’ Rights Act became law in England on Friday last week (1 May), bringing major changes for private landlords and tenants. From 1 May, no-fault evictions are banned. Landlords in the private rented sector can no longer evict tenants without a valid legal reason.
The new rules have also removed fixed term contracts, meaning all tenancies are open ended. In addition, landlords can only raise rent on a property once a year, and with at least two months’ notice, and tenants can challenge increases if they believe these are unfair.
For properties on the market, the new rules also ban offers above the advertised price to prevent bidding wars. Once an offer is accepted, landlords cannot ask for more than one month’s rent in advance as part of the deposit.
In The Picture
During periods of economic uncertainty, central banks tend to keep borrowing costs higher to control rising inflation. Take the Russia-Ukraine conflict, for example, which led to a spike in inflation and led the Bank of England (BoE) to increase the base rate to 5.25%.
To date, the Iran conflict has led the BoE to hold the base rate at 3.75%. But analysts are now predicting the BoE will increase the rate at least twice this year.
As a result, lenders have been increasing the cost of new fixed rate mortgages. The average fixed rate mortgage deal is on the rise in the UK. As the chart indicates, the average five-year fixed rate deal went up to 4.43% in March, compared to 4.01% in February.
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