CIO mid-year perspective: sentiment as a driver of performance

The second quarter of 2026 was a strong period for investors, with global stock markets delivering their best quarterly returns since 2020 despite ongoing economic and geopolitical uncertainty. Following the first quarter of 2026, I wrote about markets being driven by hope (Rallies built on hope – how markets are pricing optimism while risks persist). The importance of staying diversified when so many opposing forces are influencing growth, inflation and, ultimately, investment returns is just as true today.  

Are markets too complacent about geopolitical risks? 

The dominant themes for the strong second quarter – including the AI-driven technology rally, tenuous “ceasefire” developments in the Middle East, and a dramatic retracement in energy prices – continue to be areas to watch. 

Perceptions of a more hawkish Federal Reserve under new Chair Kevin Warsh, the mega SpaceX IPO and the ever-evolving US tariff framework provided some excitement, and potential headwinds – but ultimately proved to be less worrying for investors than many might have anticipated.

It’s a reminder that sentiment is a powerful driver for markets. The persistence of strong earnings growth and upbeat outlooks from AI-related companies drove a sense of FOMO (fear of missing out) among investors. This won out over the last quarter, but such momentum cannot be taken for granted and is not guaranteed to continue.

It’s also important to remember that as far as Middle East tensions and concerns in energy markets are concerned, inflationary pressures are likely to take time to fully dissipate. Investors have largely looked through the geopolitical noise so far, supported by hopes of diplomatic channels remaining open. However, recent developments highlight how fragile the situation remains. The conflict has exposed vulnerabilities in global energy and trade networks and we cannot assume that everything will return to normal. These events will have long-lasting implications for markets, while also influencing many of the investment trends already in motion.

Examples of this include developments in electric transport and power. A recent resurgence in electric vehicle sales has been seen across Europe, the UK and the US, driven in part by higher fuel prices following the Middle East conflict. China’s transportation sector has already been rapidly transforming, with electric truck sales reaching 20% of total truck sales in 2025, materially displacing gas consumption and reducing liquified natural gas (LNG) reliance. Meanwhile solar continues to grow and is taking a greater share of overall power generation. It is projected to become the world’s largest power source by 2032. 

Another factor supporting market and economic resilience has been the release of strategic oil reserves around the world coordinated by the International Energy Agency (IEA). The approval to release 400 million barrels of oil and refined fuel has significantly limited the overall impact of the supply disruption. However inventory levels are now at multi-decade lows and will need to be replenished. If hostilities last for much longer we can expect to see pressure on prices again. 

Even with efficiency gains and the release of emergency reserves, supply disruption has had a dramatic impact on many industries and regions. The airline industry was particularly exposed. Regions like South East Asia and India were also particularly impacted by the fuel shortages and then the associated economic demand destruction from the inability to run transport and industry. As a result, plans to build greater strategic reserves for those and other regions are underway. 

Achieving greater energy resilience will require more investment. With greater supply-chain visibility, and a willingness to prioritise security, we can expect a greater focus on renewable energy and growing reserves. Adding to this impetus is the obvious energy demands that will be required due to increasing growth in data centre facilities and the power needed to run them. The regions that want to dominate in this space will need to have energy security as their top priority. 

Building portfolios for resilience 

This quarter has reinforced the importance of maintaining diversification in portfolios. Strong earnings and positive investor sentiment have continued to support markets cannot be ignored or underestimated. At the same time, investors should be careful not to become too complacent about the key risks that exist. 

Even some so-called “safe-haven” assets, like gold, have offered less protection than investors might have expected more recently. 

Investors need to think more broadly about building portfolio resilience. The goal is balance, not bold bets, in times like this. 

Realism, not pessimism 

Markets may well continue to rally. As I’ve said before, sentiment is a powerful force, particularly when reinforced by a constant flow of information and easier access to investing with retail trading platforms. But investors should be careful not to mistake sentiment for certainty. In an environment risk and uncertainty are an ongoing feature rather than fleeting, disciplined investing and realistic expectations matter more than ever. Today’s environment does not call for pessimism, but it does call for realism.