LGT Private Banking House View

May 2026 - in a nutshell

With the conflict in the Middle East and the temporary closure of the Strait of Hormuz, the markets are facing a major macroeconomic shock, yet they have so far reacted with surprising calm. Momentum remains intact, and falling prices continue to be used as an opportunity to "buy the dip" against the backdrop of a rapidly changing news landscape. Reflation driven by higher oil and gas prices therefore remains the most likely base case. Yet the risk scenario of stagflation is also becoming increasingly distinct: the positive correlation between equities and government bonds - historically a hallmark of stagflationary trends - has returned.

  • Date
  • Auteur Patrick Huber, Investment Solutions Europe, LGT Private Banking
  • Temps de lecture 7 minutes

Oil tank
© Shutterstock

The impact varies significantly by region: the US is benefiting from its energy position and more robust earnings growth, whilst the eurozone, as an energy-import-dependent, industry-oriented economy, is under significantly greater pressure. At the same time, the tailwind from monetary policy is waning – the US Federal Reserve (Fed) is likely to ease policy more slowly than hoped, whilst the ECB may even tighten further for the time being.

Accordingly, we have adjusted our focus: Equities remain at "Strategic Weight", with US equities favoured over the euro area; bonds are "Underweight" overall, and emerging market bonds in hard currency have been selectively upgraded. In parallel, alternative investments are regaining importance. Following the recent correction, gold underscores its role as a strategic hedging component in a world of geopolitical tensions and high government debt; Overall, alternative investments are now "Overweight", funded by previously built-up liquidity. We see tailwinds for the euro in the coming quarters due to a narrowing interest rate differential with the US dollar, even if the path to this is likely to be marked by episodes of heightened volatility. 

Macroeconomic environment

The Iran war has triggered an oil price surge of around 65% versus end-2025 levels, measurably accelerating inflation - to 3.3% in the US and 2.6% in the eurozone. The economic costs are now spilling over into the growth dimension: consumer sentiment and investment appetite are cooling noticeably. Stagflationary pressure, monetary headwinds and an exceptionally wide dispersion of outcomes call for a muted risk exposure.

Investment strategy

Although risk assets have recently gained momentum, our optimism remains cautious, and we continue to view market risks as symmetrical. We therefore reaffirm our balanced risk appetite, maintain our tactical equity positioning at strategic weight, and stick to our tactical "Underweight" stance on investment-grade corporate bonds, meaning fixed-income securities remain "Underweight". For equities, we are on the one hand upgrading US stocks to "Overweight" and on the other downgrading eurozone stocks to "Underweight". In addition, we are increasing our tactical gold position to "Overweight", as positioning now appears lower and price momentum is strengthening again. This brings our overall position in alternative investments to "Overweight", financed by the excess liquidity built up in February, which is now back at strategic weight.

Equity strategy

After global equity markets - as measured by the MSCI AC World index - corrected by almost 10% due to the conflict in the Middle East, it quickly recovered to its pre-crisis level following the announcement of a ceasefire between the US and Iran. Investors now appear convinced that the worst of the risks are behind us; whether this is the case remains to be seen. While positioning supported the recovery - many investors had reduced their equity exposure, sold equities short, or hedged via futures - strong earnings expectations are primarily driving the rebound. However, the conflict could weigh more heavily on economic activity, and thus on corporate earnings, than markets currently anticipate. Therefore, we are maintaining a more balanced risk appetite and are focusing on more defensive, less cyclical regions and sectors. We are upgrading the US and the technology sector to "Attractive". At the same time we are downgrading eurozone equities to "Unattractive" and the industrials sector to "Neutral".

Fixed-income strategy

The Iran conflict has created a stagflationary environment that confronts markets with difficult trade-offs. At the short end of the yield curve, we see the risk of an overshoot, as the implied real rate is already markedly restrictive while long-term inflation expectations remain well anchored. In hard currency emerging market bonds, by contrast, we view the elevated all-in yield as an attractive entry point against a backdrop of intact fundamentals and upgrade the segment from "Neutral" to "Attractive".

Currency strategy

Our EUR/USD outlook is positive for the euro over the coming months, as we now expect one rate cut by the US central bank in 2026 alongside one rate hike by the ECB, implying a narrowing of the interest rate differential in favour of the euro versus the US dollar. As the US policy rate advantage erodes, capital flows and relative yield considerations should increasingly support the euro, with our fundamental models placing medium‑term "fair value" at 1.16–1.17, but with the spot rate likely to overshoot toward our targets of 1.20 on a six-month horizon and 1.22 on a twelve-month horizon. 

Precious Metals

We have turned constructive on gold again, viewing the recent sell‑off in March as a liquidity- and momentum-driven shake‑out rather than a structural break in the investment case. We have therefore re-engaged in an "Attractive" stance versus the US dollar with unchanged upside targets of USD 5300 over six months and USD 5500 over twelve months. The macro backdrop of gradually decreasing US policy rates and a weakening dollar, combined with ongoing central bank diversification and lighter speculative positioning, underpins a favourable risk‑reward profile for gold, even if near‑term price action remains sensitive to energy shock‑driven deleveraging.

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