May monthly market update - Reflections on April 2026

What is driving US stocks higher?

US stocks have surged to record highs, buoyed by signs of a resolution in the Middle East conflict and strong earnings growth. The rise comes despite the economic fallout from the war in Iran, which has kept oil prices volatile and weighed on global growth.

The S&P 500 climbed 10% in April, closing above 7,000 points for the first time in its history, after rebounding from a sell-off triggered by surging energy prices linked to the Middle East conflict*.

Gains have been driven by the technology sector, with the tech-heavy Nasdaq climbing 15% in April, its best month in six years. Demand for AI-related infrastructure and services remained strong, with semiconductor and mega-cap companies posting substantial gains.

The rebound also broadened beyond technology, with strong gains across financials, consumer stocks and industrials, highlighting the resilience of the US economy. Earnings expectations have continued to rise despite elevated energy prices and geopolitical uncertainty, with first-quarter results proving exceptionally strong.

Growing optimism that the war could soon end has also lifted markets, with indices rising sharply after the ceasefire announcement. A new peace framework further improved sentiment. Investors also tend to look ahead rather than focus on current conditions, helping explain the strength of the rally.

Ultimately, markets are signalling expectations that tensions will ease, the war will end in the near term and the Strait of Hormuz will reopen. Despite the conflict, the market reaction has been relatively muted, reflecting expectations on Wall Street that disruption will be temporary and have only a limited effect on energy markets and the global economy.

What is the outlook for the UK economy if the Iran war persists?

The US–Iran war continues to dominate headlines, with its effects already feeding through to the UK economy. UK inflation rose from 3% in February to 3.3% in March, driven mainly by higher fuel prices.

Disruption in the Strait of Hormuz has kept oil prices volatile, with crude topping $126 a barrel in April, its highest level since 2022. Even if hostilities ended today, prolonged disruption in the Strait could continue to affect supply chains for months.

Britain remains particularly vulnerable to energy shocks because fossil fuels account for a larger share of its energy mix than in many economies that have moved further towards electrification. Volatility in gilt markets is also feeding through to the economy as higher borrowing costs push up mortgage rates.

Economists warn that the longer the Middle East conflict lasts, the greater the damage to growth. The EY Item Club expects the UK economy to flatline in the second and third quarters, bringing it close to recession.

Growth is expected to halve, reversing momentum seen before the war began. The group also expects unemployment to rise, with almost a quarter of a million people potentially losing their jobs by the middle of next year.

Although the Bank of England held interest rates at 3.75% in April, it warned that the Iran-related energy shock could drive both inflation and borrowing costs higher.

In its worst-case scenario, where oil and gas prices remain elevated for a prolonged period, inflation could rise as high as 6.2%, with interest rates potentially climbing above 5%.

What’s next for interest rates?

The world’s largest central banks have kept borrowing costs on hold amid rising concerns over the inflation shock caused by the Iran war. Policymakers at the US Federal Reserve (Fed), the Bank of England, the European Central Bank (ECB) and the Bank of Japan all left rates unchanged in April as they assess how long the disruption from the conflict may last and how severe the inflationary effects could become.

With inflation rising, growth slowing and uncertainty over the duration of the energy shock, central banks face a difficult balancing act. Raising rates could help contain inflation but also risks tipping fragile economies into recession. For now, policymakers have decided to leave rates unchanged.

The Bank of England kept rates at 3.75% in April after inflation rose from 3% to 3.3% in March. The Bank said higher inflation now appears unavoidable and signalled that rates could rise this year. Markets are now pricing in as many as three rate increases, compared with expectations for gradual cuts before the war began.

Expectations of Fed rate cuts have also fallen since the start of the year, despite Trump nominee Kevin Warsh preparing to replace Jerome Powell as Fed chair. Markets now see a possibility that the Fed could raise rates within the next 12 months, a sharp contrast to the one or two cuts expected earlier this year.

Meanwhile, Bundesbank President Joachim Nagel has warned that the ECB may need to raise rates at its next meeting if inflation pressures fail to ease.

Looking ahead

US economic growth rebounded to an annualised rate of 2% in the first quarter as businesses increased investment in artificial intelligence. However, rising inflation is putting households under greater pressure, with average gasoline prices climbing above $4 a gallon. Consumer spending, the main driver of the US economy, was already slowing before the war with Iran began.

Global inflationary pressures are also intensifying. OECD inflation rose to 4.0% in March 2026 from 3.4% in February, driven by surging energy costs. Prices increased in 33 of the organisation’s 37 member countries, raising concerns that the post-pandemic decline in inflation may be stalling.

China’s economy expanded faster than expected in the first quarter thanks to strong exports. However, while the country has so far remained resilient to the energy shock due to its diversified energy mix and reserves, signs of strain are emerging as the conflict disrupts global supply chains.

* S&P Global and Wesleyan.