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From Middle East Tensions to AI Growth: What Moved Markets in May

Home | From Middle East Tensions to AI Growth: What Moved Markets in May

Global markets delivered positive returns during May despite heightened geopolitical tensions and persistent inflation concerns. Investor sentiment was supported by continued optimism surrounding artificial intelligence (AI), resilient economic data and improving ceasefire prospects in the Middle East. While developments surrounding the Strait of Hormuz drove periods of volatility across energy markets, equities remained focused on the strength of corporate earnings, and the potential benefits of continued AI-related investment. Bond markets were more cautious, as inflation data across several major economies reinforced expectations that interest rates may remain elevated for longer than previously anticipated.

Geopolitics Keeps Markets on Edge

  • US-Iran tensions, and negotiations surrounding the Strait of Hormuz, remained a key focus for investors throughout May.
  • Hopes of a ceasefire extension improved market sentiment at various points during the month. However, concerns over further escalation persisted.
  • Oil prices experienced significant volatility as markets weighed the risk of supply disruption against improving diplomatic progress.
  • Higher energy prices reignited concerns that inflation could remain elevated, complicating the outlook for central banks.

AI Optimism Continues to Support Risk Assets

  • Artificial intelligence remained a dominant market theme, supporting global equity markets despite geopolitical and inflationary headwinds.
  • Technology and semiconductor-related sectors continued to benefit from strong demand linked to AI infrastructure investment.
  • Corporate spending plans remained supportive, helping to underpin earnings expectations and investor confidence.
  • Market leadership broadened beyond the US, with several Asian and Emerging Market economies benefiting from increased technology investment and supply chain demand.

Global Inflation Pressures Re-Emerge

  • US core Personal Consumption Expenditure (PCE) inflation, the Federal Reserve’s preferred inflation measure, rose to 3.3% year-on-year. Meanwhile, headline PCE inflation increased to 3.8%.
  • UK shop price inflation accelerated to 1.2% in May from 1.0% in April, highlighting ongoing pricing pressures.
  • UK unemployment rose to 5.0%, its highest level in almost five years, pointing to a gradual softening in labour market conditions.
  • Across Europe, higher energy costs and rising input prices led to upward revisions to inflation expectations and reinforced a cautious policy outlook.

In summary

Global markets delivered positive returns in May despite ongoing geopolitical tensions and renewed inflation concerns. Investor sentiment was supported by continued enthusiasm around artificial intelligence, resilient corporate earnings, and broadly stable economic data, even as developments in the Middle East contributed to periods of volatility, particularly in energy markets. Inflation readings in several major economies remained sticky, reinforcing expectations that interest rates may stay higher for longer, which weighed on bond markets. Equities, however, continued to perform well, led by technology and AI-related sectors, with broader participation across Asia and emerging markets. Overall, while uncertainty remains elevated, markets were encouraged by strong corporate fundamentals and continued structural growth themes.

While short-term volatility is likely to persist as markets respond to inflation data, interest rate expectations and geopolitical developments, it’s important not to lose sight of the bigger picture. Periods of uncertainty are a normal part of investing and are often the trade-off for long-term growth. A well-constructed, diversified portfolio is designed to help smooth these ups and downs and keep you aligned with your longer-term goals.

As always, the key is to remain focused on your financial plan rather than reacting to short-term market noise. If you’re unsure how recent events may have impacted your investments or objectives, we’re here to review your position and provide reassurance where needed. Please contact us to have a conversation.