Markets in May remained dominated by developments in the Middle East, although sentiment fluctuated sharply as investors moved between fears of prolonged disruption and hopes for a diplomatic breakthrough. The conflict around the Strait of Hormuz continued to drive energy markets, with oil prices repeatedly moving above $100 per barrel before retreating on reports of potential negotiations. These swings in energy prices became the primary driver of market volatility, influencing inflation expectations, bond yields, and broader risk appetite.

Equity markets demonstrated surprising strength despite the uncertain backdrop. US indices continued to outperform and reached fresh highs during parts of the month, supported by exceptionally strong corporate earnings and ongoing enthusiasm surrounding AI related investment. However, gains were frequently interrupted by shifts in geopolitical sentiment and concerns that higher energy prices could eventually weigh on economic growth and corporate margins.

Bond markets remained volatile. Government bond yields moved higher during periods of escalating geopolitical tension as investors priced in the inflationary consequences of sustained energy price pressures. At the same time, expectations for monetary easing were repeatedly pushed back, with central banks remaining cautious in the face of persistent inflation. Yields temporarily eased when reports suggested progress towards a US-Iran agreement, highlighting the extent to which fixed income markets have become sensitive to developments in energy markets and the broader geopolitical environment.

Fiscal concerns also remained in the background. Investors continued to scrutinise government borrowing requirements across major economies, particularly in the United States, where elevated deficits and higher financing costs have contributed to ongoing volatility in longer-dated bond markets. Policymakers face an increasingly difficult balancing act between supporting growth, managing inflation, and maintaining confidence in public finances.

Economic data released during the month reinforced the picture of a global economy that continues to expand, but at a slower and increasingly uneven pace. Labour markets remain relatively resilient, although hiring activity has moderated and forward-looking indicators suggest a gradual cooling in employment conditions. Inflation has remained stubbornly above central bank targets, particularly within services sectors, while the rise in energy prices has complicated the disinflationary progress seen earlier in the year. This combination of slowing growth and persistent inflation has reinforced concerns that policymakers may have limited flexibility should economic conditions deteriorate further.

Overall, May reinforced the key themes that have shaped markets throughout 2026. Strong corporate earnings and continued enthusiasm around technological innovation have supported risk assets, but this optimism increasingly sits alongside higher energy prices, persistent inflation pressures and heightened geopolitical uncertainty. Markets continue to assume that growth can remain positive and inflation can gradually moderate without a significant economic slowdown. While that outcome remains possible, valuations leave limited room for disappointment, and market direction is likely to remain highly sensitive to developments in energy markets, inflation trends and geopolitical stability over the months ahead.