Investors fear renewed escalation in the Middle East
Hopes for a durable agreement between the United States and Iran have given way to renewed uncertainty after tensions between the two countries flared up once again. Investors are particularly concerned about the implications for energy supplies from the Gulf region. While oil prices had previously fallen on expectations of a ceasefire, that trend has now reversed, with both oil and gas prices moving sharply higher.
Higher energy prices increase the risk that inflation will remain elevated for longer and have also pushed bond yields upwards. Whereas lower oil prices had previously offered relief to consumers and businesses, the recent surge threatens to drive up energy costs and revive inflation concerns.
Interest rates are not rising because of oil alone
The Federal Reserve's monetary policy remains a key factor for markets. Although investors broadly expect official interest rates to remain unchanged for the time being, markets continue to price in a meaningful probability of a 25-basis-point rate increase.
Persistent inflationary pressures and uncertainty surrounding energy prices make it difficult for the Fed to signal a clear path towards monetary easing. As a result, market expectations have shifted considerably. Whereas investors previously anticipated several rate cuts, many now expect interest rates to remain higher for longer. This has supported government bond yields while creating challenges for interest-rate-sensitive sectors of the equity market.
Middle East tensions push energy prices higher
"}},{"alignedImage":{"position":"bottom"},"componentType":"paragraph","richBody":{"value":"Equity markets continue to benefit from strong corporate results
Despite recent declines, equity markets continue to receive support from generally strong earnings reports. Many companies are meeting or exceeding lofty investor expectations this reporting season. At the same time, performance differences between sectors have become increasingly pronounced. Technology and AI-related companies were among the standout performers during the first half of the year and, in many cases, reached record valuations.
However, investors are increasingly questioning whether these already high expectations can continue to be exceeded. This has triggered sharp corrections in several semiconductor stocks in recent weeks, particularly in South Korea. Earlier this year, the Kospi Index benefited significantly from strong gains in memory-chip producers Samsung and SK Hynix. More recently, sentiment has shifted, with investors questioning the sustainability of current earnings growth across the semiconductor industry.
Fundamentally, little has changed for many technology and semiconductor companies. Earnings remain strong, but volatility has increased markedly. Investors have become more demanding when assessing future growth prospects, while capital is simultaneously flowing towards lagging sectors such as consumer staples and regions such as China.
"}},{"componentType":"sectionTitle","title":"What's happening in the economy?"},{"alignedImage":{"position":"bottom"},"componentType":"paragraph","richBody":{"value":"Eurozone growth accelerates despite geopolitical uncertainty
Business confidence in the eurozone has come under pressure in recent months due to ongoing tensions in the Middle East. Nevertheless, the latest purchasing managers' surveys point to a clear improvement in economic activity. The eurozone composite PMI rose from 50.0 to 51.9 in July, comfortably exceeding economists' expectations. A reading above 50 indicates economic expansion.
Both manufacturing and services contributed to the improvement, suggesting that the eurozone economy is regaining momentum. Stronger-than-expected readings from Germany and France indicate that economic growth could accelerate again in the third quarter after a softer period earlier in the year. It should, however, be noted that lower oil prices during June provided a significant boost to business sentiment.
Although the recent rise in oil prices presents a risk to the recovery, the data suggest that companies remain resilient for the time being. The eurozone economy therefore appears more resilient to geopolitical uncertainty than previously feared.
Inflation pressures pause in the Eurozone
Companies in both manufacturing and services continue to report rising costs, but price pressures are increasing less rapidly than previously anticipated. At the same time, improving business activity suggests growing confidence in the economic outlook.
The recent rebound in oil prices, driven by renewed tensions in the Middle East, does create the risk that inflationary pressures could strengthen again in the months ahead. For now, however, companies appear hesitant to pass these higher costs on to customers.
The European Central Bank (ECB) therefore faces a delicate balancing act. While survey data point towards moderating price pressures, higher energy costs pose an ongoing inflation risk. As a result, the scope for rapid interest-rate cuts appears limited, but there is currently little justification for additional rate hikes either.
The US economy remains resilient
The US economy continues to show remarkable resilience. The latest PMI surveys point to a further acceleration in growth, with the composite PMI rising from 51.9 to 53.6 in July, well above economists' expectations. Both manufacturing and services exceeded forecasts, suggesting that US companies continue to benefit from resilient domestic demand and a supportive business environment despite higher interest rates and geopolitical uncertainty. Strong PMI data also indicate that the economy could maintain a healthy pace of growth in the third quarter.
The strength of the economy gives the Fed greater scope to keep interest rates elevated for longer. Indeed, markets are increasingly considering the possibility of another rate increase later this year.
Meanwhile, American consumers continue to spend despite weak confidence levels. Retail sales rose by 0.2% in June after increasing by 1.0% in May, supported by a still-robust labour market. Although job creation slowed to 57,000 positions in June, unemployment unexpectedly declined from 4.3% to 4.2%, remaining close to historic lows.
"}},{"componentType":"sectionTitle","title":"What's our view?"},{"alignedImage":{"position":"bottom","altTextEN":"Graph from the Monthly Investing Outlook August","altTextNL":"Graph from the Monthly Investing Outlook August","extension":"png","original":"https://assets.ing.com/asset/fb216152-3c86-48e9-9ce4-6d2af097c265/Valuations.png","transformBaseUrl":"https://assets.ing.com/transform/fb216152-3c86-48e9-9ce4-6d2af097c265/Valuations"},"componentType":"paragraph","richBody":{"value":"Earnings expectations revised higher
Another quarter of better-than-expected results continues to provide strong support for equity markets. Many companies have exceeded already elevated expectations, particularly in technology, where businesses continue to benefit from the ongoing wave of investment in artificial intelligence.
At the same time, investors have become more selective. Strong results alone are no longer sufficient to guarantee share-price gains, especially in technology and semiconductors. Recent declines in stocks such as SK Hynix illustrate that investors are increasingly focused on the sustainability of growth, profitability and future investment returns.
Valuations have become much more attractive
"}},{"componentType":"paragraph","richBody":{"value":"Market gains are broadening beyond technology stocks
Despite the higher bar set by investors, the earnings outlook for many companies remains favourable. Analysts continue to expect above-average profit growth, with AI-related sectors remaining key contributors. Importantly, market gains are no longer being driven solely by large technology companies. On 28 July, the equal-weighted S&P 500 index reached another record high. Unlike the traditional S&P 500-index, where mega-cap technology stocks dominate returns, each constituent carries the same weight in the equal-weighted index. In fact, the so-called Magnificent Seven have fallen by an average of 3.4% this year, while the S&P 500 excluding these companies has gained 13.4% in US dollar terms. This suggests that earnings growth is broadening across the wider market.
Strongly received results from companies such as Coca-Cola and Unilever demonstrate that attractive growth opportunities extend well beyond the technology sector. As a result, earnings growth has become less dependent on a small group of technology companies than was the case earlier in the year.
Downgrading Europe, upgrading Japan
Within equities, we maintain a neutral allocation to US stocks but downgrade European equities to underweight. Compared with the United States, South Korea and Taiwan, Europe has fewer companies positioned to benefit from structural technology trends and is more exposed to higher energy costs. By contrast, we are upgrading Japan to neutral. Earlier concerns about weaker earnings growth relative to emerging markets have largely disappeared. Japan is also a major supplier of robotics, semiconductor equipment and other technologies that benefit from the growing adoption of artificial intelligence. This provides an attractive opportunity to broaden our AI and technology exposure beyond the United States and emerging markets.
Emerging markets continue to offer a compelling earnings story. Earnings growth of more than 65% is forecast for the year, making emerging markets the fastest-growing major equity region. Importantly, valuations remain below their long-term average, unlike those in the US market.
Technology stocks remain attractive
Despite recent declines, we maintain our overweight position in technology. Earnings growth within the IT sector remains superior, supported by massive investment in AI infrastructure. Strong demand and limited supply of memory chips continue to underpin the sector's outlook, while lower share prices have improved valuations. Software companies, many of which have lagged the broader technology sector this year, may also offer attractive opportunities.
Energy and healthcare moved to neutral
The healthcare sector continues to face regulatory uncertainty, margin pressure and less attractive earnings prospects than in previous years. We have therefore reduced our overweight position to neutral. At the same time, the energy sector has become increasingly attractive. Valuations remain reasonable, cash flows are robust, and persistent geopolitical tensions continue to support profitability. On balance, we no longer see a compelling reason to deviate from benchmark weights in either sector and have therefore moved both to neutral.
High-yield bonds continue to show resilience
Within fixed income, we maintain our preference for spread products, particularly high-yield corporate bonds and emerging-market debt. Since the start of the year, global high-yield bonds have delivered some of the strongest returns, helped by their relatively low duration and the attractive income they provide.
Emerging-market bonds also continue to offer compelling carry characteristics.
Government bonds, by contrast, have lagged behind as yields have risen in response to deteriorating inflation expectations driven by higher energy prices. While the increase in coupons has made government bonds more attractive than before, current geopolitical risks and inflation uncertainties mean that, in our view, it is still too early to adopt a more positive stance.
Investing involves risks and costs. The value of your investment may fluctuate. Past performance is no guarantee of future results. Read more about the risks of investing.
This publication has been prepared on behalf of ING Bank N.V. and is intended for information purposes only. ING Bank N.V. obtains its information from sources deemed reliable and has taken the utmost care to ensure that the information on which it based its views in this publication was not incorrect or misleading at the time of publication. ING Bank N.V. does not guarantee that the information it uses is accurate or complete. The information contained in this publication may be changed without any form of announcement. Copyright and data file protection rights apply to this publication. Data from this publication may be reproduced provided that the source is stated. ING Bank N.V. has its registered office in Amsterdam, commercial register no. 33031431, and is regulated by the Dutch central bank De Nederlandsche Bank (DNB) and the Netherlands Authority for the Financial Markets (AFM). ING Bank N.V. is part of ING Groep N.V.
"}}]},"hasMacro":false,"id":"66802dd8-d77b-486f-8e5b-cb5280d01911","localeString":"en-GB","mainHeaderZone":{"backLink":{"textLink":{"text":"Market news and views","url":"/en/personal/investing/market-news-and-views"}},"componentType":"productHeader","coreHeader":{"body":"30 July 2026 – The simmering conflict between the US and Iran continues to weigh on equity markets, even as earnings expectations keep improving.","headerImage":{"extension":"jpg","original":"https://assets.ing.com/asset/9eb36f46-de96-40d6-a851-e479103f8449/Balance-Football-806x400.jpg","transformBaseUrl":"https://assets.ing.com/transform/9eb36f46-de96-40d6-a851-e479103f8449/Balance-Football-806x400","type":"image","width":806},"subtitle":"Market Outlook: August 2026","title":"Investors Caught Between AI Optimism and Economic Concerns"}},"publishDate":"2026-08-05T12:07:57.775+02:00"}}