Insights from Corrado Tiralongo, Chief Investment Officer, on the second financial quarter of 2026.

A shift in the market regime is underway

The second quarter has reinforced a transition that has been building for several years and is now increasingly difficult to ignore. Markets are no longer primarily driven by demand cycles or monetary policy timing. Instead, supply-side shocks, geopolitical fragmentation, and structural constraints are becoming the dominant forces shaping outcomes.

This is not a temporary repricing of risk. It reflects a shift in what is driving the cycle.

At the start of the year, we outlined five structural forces shaping 2026 including:

1. Ongoing trade fragmentation
2. A gradual shift toward monetary easing
3. The risk that supply disruptions could re-emerge as a driver of inflation

The developments of the past quarter are not a departure from that framework, but an acceleration of it. What has changed is not the direction of travel, but the intensity and immediacy with which these forces are now influencing markets.

Recent developments, including the escalation in Middle East tensions and the associated move in energy markets, are not isolated events. They are part of a broader pattern where global chokepoints, whether in energy, trade routes, or critical inputs, are increasingly influencing inflation, growth, and market volatility.

While headline market volatility has moderated in recent days, measures of implied volatility remain elevated, suggesting that underlying uncertainty has not dissipated, but is instead being carried forward into expectations.

The implication is clear. The global economy is becoming less efficient, more fragmented, and more volatile.

Supply shocks are no longer episodic

For much of the past four decades, economic cycles were largely demand-driven. When growth slowed, central banks eased policy. When inflation rose, they tightened. The framework was relatively stable and predictable. That framework is now being challenged.

The pandemic exposed supply chain fragility. The Russia-Ukraine conflict highlighted energy dependencies. More recent disruptions to key shipping routes and the risk of energy supply constraints have reinforced how concentrated and vulnerable the global production system has become.

This reflects a broader shift in the global economy. Supply-side disruptions, once relatively infrequent, are now a more persistent and central driver of economic volatility, replacing the demand-driven cycles that characterized much of the past several decades.

What is different today is not just the frequency of these shocks, but their nature:

• They are increasingly geopolitical rather than economic
• They are concentrated in critical inputs such as energy and semiconductors
• They are difficult to substitute in the short term

Crucially, the economic effects of these shocks are not linear. The longer disruptions persist, the more they extend beyond primary commodities into refined products and critical inputs embedded deep within global supply chains. At that point, the impact broadens and intensifies, amplifying both inflationary pressure and growth headwinds.  

Oil has reached the threshold, but transmission matters

On March 1, following the initial escalation in the Middle East, we outlined a clear condition for reassessing portfolio positioning: a sustained move in oil prices toward $100 per barrel, combined with evidence that higher energy costs were tightening financial conditions and impairing growth. We are now in the first part of that condition.

Brent crude moved from approximately $78 per barrel at the start of March to a peak near $115, before settling closer to $100 ¹ . This reflects a shift from a geopolitical risk premium to a market increasingly focused on potential supply disruption. The path of that move matters.

This has not been a gradual repricing, but a volatile adjustment as markets assess both the probability and duration of disruption. The more important question is whether prices remain elevated and begin to transmit more broadly through the economy.

At this stage, the evidence remains incomplete. Higher energy prices are beginning to lift headline inflation and compress real incomes. However, there is limited evidence that this has translated into tighter financial conditions, wider credit spreads, or a material deterioration in growth expectations. At the same time, market pricing in several regions appears to be reflecting outcomes more consistent with a more adverse scenario, suggesting that financial conditions may tighten ahead of any realized economic deterioration.

This creates a divergence between current conditions and market expectations, with markets beginning to price a deterioration in growth and financial conditions that is not yet evident in the data. In that context, the threshold for reassessing positioning remains tied to realized transmission, rather than forward-looking pricing alone. This distinction is critical. A move to $100 is a threshold. It is not, on its own, a regime shift. A sustained period at elevated levels, combined with second-round effects on inflation and demand, would represent a more meaningful macro development.

The duration of the shock remains the critical variable. A short-lived disruption, even if severe, is more likely to result in a temporary increase in inflation and a modest drag on growth. A more prolonged disruption, particularly one that materially constrains supply, would have more significant consequences, including a higher probability of a broader economic slowdown.

The impact is also uneven across regions. Energy-importing economies, particularly in Europe and parts of Asia, are more exposed to sustained price increases, while producers such as the United States and Canada are relatively better positioned to absorb or offset the shock. We are monitoring that transition closely.  

Inflation is becoming more volatile, not structurally higher

A key question for investors is whether these dynamics lead to persistently higher inflation. The evidence suggests a more nuanced outcome.

Supply shocks tend to push prices higher in the short term, particularly in energy and commodities. However, these effects are often temporary. As supply adjusts, demand softens, or alternative sources emerge; prices can retrace, sometimes sharply.

The more important question is whether these shocks trigger second-round effects. If higher energy prices feed into wages, expectations, and broader pricing behaviour, inflation can become more persistent. If not, the impact is more likely to remain transitory.

A key transmission channel is the labour market. The extent to which higher energy prices translate into broader inflation depends on whether they feed into wage growth and pricing behaviour. With labour markets generally less tight than in 2022, the risk of sustained second-round effects appears more contained, although it remains an important variable to monitor.

The challenge is not higher inflation, but more volatile inflation with episodic persistence.  

Central banks are operating with less control

Monetary policy remains a powerful tool, but it is increasingly being applied to problems it was not designed to solve.

Interest rates can influence demand. They cannot produce more oil, resolve geopolitical conflicts, or rebuild supply chains.

As a result, central banks are increasingly reactive rather than proactive, focused on anchoring expectations rather than fine-tuning economic outcomes.

The current environment also highlights that policy responses will diverge. Central banks are facing the same shock, but not the same starting conditions:

Economies with tighter labour markets and more persistent inflation risks may lean toward further tightening. Others, where growth is weaker or inflation is better contained, can afford to wait or look through the shock. In some cases, market pricing itself is tightening financial conditions before policy action is even taken.

In most advanced economies today, the shock appears to be primarily supply-driven, allowing central banks some scope to delay easing rather than immediately tighten, provided inflation expectations remain anchored.

In this environment, the most likely policy response is not an immediate tightening cycle, but a prolonged period of holding rates in a neutral to moderately restrictive range, as policymakers prioritize anchoring inflation expectations while assessing the persistence of the shock.

However, the margin for error is narrow. If supply shocks prove more persistent and begin to influence underlying inflation, policymakers may be forced into a more difficult trade-off, tightening policy into weakening growth to maintain credibility.  

Global fragmentation is reshaping the opportunity set

Underpinning these developments is a broader structural shift.

The global economy is moving away from integration and toward fragmentation. Trade relationships are increasingly influenced by geopolitical alignment. Supply chains are being redesigned with resilience and security in mind, rather than purely cost efficiency.

This transition has several implications:

• Capital allocation is becoming more regional
• Industrial policy is playing a larger role in shaping economic outcomes
• Fiscal spending is rising, particularly in defence and strategic infrastructure
• Trade flows are becoming less predictable

Fragmentation is no longer a slow-moving policy trend. It is increasingly shaping real economic outcomes through supply availability, pricing dynamics, and capital flows. While this may introduce inefficiencies, it does not necessarily undermine long-term growth. Technological progress remains the dominant driver of economic expansion, even in a more fragmented world.  

What this means for portfolios

From a portfolio perspective, the shift we are observing reinforces several themes that have been guiding our positioning. We believe that:

1. Diversification is becoming more important. A market environment driven by a narrow set of outcomes is being replaced by one with a wider range of potential scenarios.
2. Reliance on a single macro-outcome is increasingly risky. Portfolios positioned for a smooth disinflation and a steady easing cycle may be vulnerable in an environment where inflation is more volatile, and policy paths are less predictable.
3. Implementation matters. Exposure to long-term growth themes, including AI and innovation, remains important. However, concentration risk has increased, and the risk has shifted from valuation toward the sustainability of earnings expectations in key sectors. While the structural case remains intact, those expectations are increasingly sensitive to macro conditions, particularly if the current shock proves more persistent.
4. Alternatives play a more meaningful role. Strategies such as managed futures, managed volatility, and risk parity can help navigate environments characterized by shifting correlations, episodic volatility, and macro uncertainty.
5. Duration remains a useful risk mitigator, but with less reliability than in prior cycles. In a supply-driven inflation environment, bonds may not respond consistently to equity drawdowns, reinforcing the need for broader diversification.

A more complex, but navigable environment

The transition underway is not without challenges. A more fragmented global economy, combined with more frequent and potentially persistent supply shocks, implies greater uncertainty and volatility. However, it is important to distinguish between complexity and fragility.

The global economy continues to adapt. Supply chains are being reconfigured; alternative sources of production are emerging, and technological progress remains intact. For investors, we believe this is not an environment to avoid risk, but one that requires a more deliberate approach to managing it.

Maintaining exposure to long-term growth drivers, while broadening the sources of return and strengthening portfolio resilience, remains the most effective way to navigate what is increasingly a more complex, but ultimately still investable, environment.

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