Week ending 15th May 2026.

As you can see from the accompanying table markets experienced a more volatile week as investors balanced political developments in the UK, Middle East tensions and ongoing concerns around inflation and interest rates. Part of this week’s weakness appears to also reflect some profit-taking, following strong market performance following a robust first-quarter earnings season, in which many companies continued to deliver solid results despite an uncertain backdrop.

Q1 earnings season has provided a strong tailwind for U.S. equity markets, helping to sustain positive momentum in recent weeks. With 91% of S&P 500 companies having reported results, earnings have broadly exceeded expectations, with 84% delivering positive EPS surprises and 80% reporting revenue beats. The resilience of corporates have reinforced investor confidence in the U.S. economy and supported continued strength across equity markets.

Markets monitored the summit between U.S. President Donald Trump and Chinese President Xi Jinping this week. While the meeting did not deliver any major breakthroughs, investors were reassured by the absence of further escalation between the world’s two largest economies. Both sides signalled a willingness to continue dialogue on trade and economic cooperation, helping to stabilise broader market sentiment.

Turning to the UK, preliminary data revealed that the economy grew by 0.6% in Q1 2026, in line with expectations and up from 0.2% in Q4 2025, driven by services, notably retail, wholesale, and computer programming. This points to solid near-term resilience.

Growth in March surprised to the upside, rising 0.3% versus expectations of a contraction. However, underlying signals are more mixed. Consumers may be starting to curb discretionary spending amid concerns over rising inflation, particularly linked to energy costs. Businesses are also facing renewed pressure, with input prices rising sharply and job vacancies continuing to decline, hinting at softer demand ahead. While retail sales and PMIs remain relatively firm, some strength may reflect front-loaded spending ahead of further price increases. Overall, the data is reassuring for now, but risks point to a moderation in growth over coming quarters.

Political uncertainty was a focal point in the UK. UK government borrowing costs rose, with the 10-year gilt yield briefly rising above 5.17% on Friday. The pound also weakened against the U.S. dollar, while UK equities ended the week slightly lower. Much of the noise was driven by political uncertainty surrounding Prime Minister Keir Starmer’s leadership following Labour’s disappointing local election results and speculation that Greater Manchester Mayor Andy Burnham could potentially challenge leadership.

Markets became concerned that a more left-leaning fiscal agenda under a Burnham-led government could lead to higher government borrowing and spending. However, it is important to recognise that rising borrowing costs were not unique to the UK this week. Bond yields also moved higher globally as investors continued to assess inflation risks and the probability that interest rates may remain elevated for longer.

A key driver behind those concerns was the continued rise in energy prices. Brent crude oil rose above $109 per barrel during the week amid tensions in the Middle East. Higher oil prices increase the risk of inflation remaining persistent, which in turn could delay expected interest rate cuts from central banks or even lead to rate hikes.

Political uncertainty can cause short-term market volatility, which typically subsides as clarity improves. It is important to remember the majority of FTSE 100 companies generate a significant share of revenues overseas. As globally diversified businesses, they are usually less affected by UK political developments in the long term and may also benefit from a weaker pound.

Coming up next week, China’s retail sales and industrial production. UK unemployment rate and retail sales. Federal Reserve meeting minutes. Japan’s Balance of trade.

Kate Mimnagh, Portfolio Economist