In this quarter’s CIO Lens from Schroders, their investment experts highlight the need for resilient portfolios as developments in the Middle East increase uncertainty for investors. For our multi-asset focussed content, the Schroders Multi-Asset team share their Q2 insights with Professional Paraplanner.
The below commentary comes from Schroders full Q2 CIO Lens – to view the full report and watch Joanna Kyrklund – Group CIO at Schroders video reflecting on how to devise an investment strategy amid heightened geopolitical risk head here: CIO Lens Q2 2026: Building diversified portfolios for uncertain times.
Equities (+) +
We began the year with a constructive view on equities, supported by resilient US growth, a stable labour market and expectations of continued growth in earnings.
With the risk of a recession appearing to remain low and inflation relatively contained, the macro backdrop was considered to be supportive for risk assets, even though valuations appeared increasingly stretched.
As the quarter progressed, uncertainty increased. Rising tariff pressures, signs of softer labour data and growing fiscal and political risks began to challenge the outlook.
More recently, the escalation of conflict in the Middle East and disruption to energy markets have reinforced the shift towards a more volatile and inflation-prone scenario.
However, stepping back from short-term noise, we retain our conviction in equities. Structurally higher nominal growth, driven by fiscal expansion and technological innovation, continues to support earnings.
While volatility is likely to remain high in the near term, equities remain one of the most effective ways to protect against inflation over the medium term.
Government bonds (-) –
We began the quarter with a negative view on government bonds, acknowledging that valuations appeared less stretched as yields had drifted higher, but remaining cautious given persistent concerns around fiscal sustainability and inflation risks.
As the quarter evolved, stronger than expected growth and resilient labour markets led us to question the extent of rate cuts priced by markets.
At the same time, fiscal expansion and uncertainty around central bank policy – particularly in the US – reinforced the risk of a more inflationary backdrop.
The conflict in the Middle East has further amplified these risks through higher and more volatile energy prices.
Before the crisis started, central banks, particularly the Federal Reserve, were facing pressures to balance signs of labour market softening against inflation risks, potentially leading to more accommodative policy than inflation dynamics would otherwise justify.
However, given the risk of energy prices now driving inflation higher, we expect the Federal Reserve to adopt more of a “wait and see” approach and postpone the previously anticipated rate cuts.
In this environment, bonds are less effective as shock absorbers than in the past. We therefore maintain a negative view on government bonds, reflecting an unfavourable risk-return profile and the risk that inflation remains under-estimated.
Commodities (+) 0
We entered the year with a positive view on commodities, supported by tight supply conditions and the strategic role of commodities, particularly gold, as a hedge against geopolitical and fiscal risks.
As inflation risks have increased and the global economy has shifted towards a more volatile, supply-constrained regime, the case for real assets has strengthened.
Commodities provide an important hedge against both geopolitical shocks and structurally higher inflation.
However, following the sharp rise in oil prices linked to Middle East tensions, we have moved to a more neutral stance overall. Commodity markets now reflect a more balanced risk-reward profile given uncertainty around both demand and the duration of supply disruptions.
Credit (0) –
We maintained a broadly neutral stance on credit for much of the quarter.
The macroeconomic backdrop remained supportive, with resilient growth, solid corporate fundamentals and healthy balance sheets underpinning the asset class.
However, valuations remained a persistent concern. Tight spreads and elevated issuance have left little room for error, particularly in an environment where inflation risks and policy uncertainty were rising.
By the end of the quarter, we had turned more cautious.
The combination of tighter financial conditions, potential spillovers from private credit stress and increasing stagflationary risks, particularly following the energy shock, led us to downgrade our view.
To view Schroders full report, head here: CIO Lens Q2 2026: Building diversified portfolios for uncertain times.
Main image: lens, magnifying glass, mj-duford-P_5mirRrg0k-unsplash
