Last month marked a return of investor favour towards the USD. The ongoing AI boom is keeping US assets attractive, warranting equity inflows. Meanwhile, the Fed’s hawkish outlook in its ‘dot plot’, together with indications that new Fed Chair Warsh will not oppose a tight monetary policy, has widened rate differentials.

At the same time, the structural current account deficit has narrowed due to higher US energy exports and weaker imports in light of softer consumer demand. As a result, fewer inflows are needed to balance USD outflows. We have acknowledged these developments by revising our USD outlook to near-term robustness and less-pronounced long-term weakness. We are refraining from an outright bullish stance, however, as markets may still have to price out the expected Fed rate hike.

In comparison to other currencies, the JPY has continued to weaken despite the BoJ’s rate hike and interventions, gaining popularity as a carry-trade funding currency. Authorities have changed the intervention strategy, refraining from announcements and instead seeking to temper markets through the risk of surprise interventions. Given the ongoing interest rate disadvantage, we doubt that this approach will achieve more lasting success and do not see it as a hurdle for a downward revision of our JPY outlook. 

In the UK, the leadership crisis culminated in the retirement of Prime Minister Starmer. With Andy Burnham in place as his unchallenged successor, political uncertainty has remained surprisingly contained. The GBP has benefited despite looming fiscal concerns, prompting us to raise our short-term forecast modestly. Meanwhile, the CHF may face softer months ahead, as receding geopolitical risks bring its interest rate disadvantage back into focus. The de-escalation in the Strait of Hormuz is also creating a softer patch for commodity currencies, although the supportive carry story remains intact for both the AUD and the NOK.

Q2 earnings preview: Looking beneath the headlines

The Q2 earnings season kicks off next week, providing an important update on the resilience of US corporate earnings and the strength of the USD. Consensus expects S&P 500 earnings to grow by 23.3% year-on-year, marking the second consecutive quarter of earnings growth above 20% and the seventh straight quarter of double-digit growth. Information technology (IT) is once again expected to be the main driver, supported by semiconductor earnings growth of around 130%, while higher energy prices should provide a significant boost to commodity-related companies. Remarkably, just two semiconductor companies are expected to account for roughly 40% of total S&P 500 earnings growth. At first glance, this concentration may suggest that expectations have become overly ambitious. However, the broader earnings picture appears to be considerably more balanced. Consensus expects the median S&P 500 company to grow earnings by around 9%, while ten of the eleven sectors are projected to deliver positive earnings growth. Healthcare remains the only exception, with earnings expected to decline 9.5% due largely to one-off charges at an individual company. Excluding this effect, underlying healthcare earnings are still expected to increase by around 6.5%.

Early indicators also reinforce a constructive outlook. Companies have issued positive guidance at an unusually strong pace, with 57% of pre-announcements exceeding consensus expectations versus a historical average of 41%. In addition, the cohort of early reporters has so far delivered results above the historical norm, providing further evidence that corporate fundamentals remain resilient heading into the reporting season. Against this backdrop, we expect another solid earnings season. While semiconductors and energy will likely dominate the headline growth, expectations for the broader market re-main achievable, leaving room for upside surprises across the rest of the index.

Looking ahead: What do investors need to know?

Halfway through 2026, investors cannot complain about it being an uneventful year so far. The first six months delivered resilience where many expected fragility, with exuberance about artificial intelligence (AI), geopolitical flare-ups, and policy uncertainty all jostling for attention. If the usual pattern seen during US midterm election years holds, the summer script now looks fairly clear. The first half of July may still retain a constructive seasonal tone. After that, markets are likely to turn more rangebound, with leadership rotating repeatedly across sectors, regions, and themes. However, that would not necessarily be a bearish message; it would simply mean that the next phase may be less about index direction and more about relative winners and losers. Moreover, this could be amplified by one of the more spectacular earnings seasons in recent memory, both on the upside and the downside, given how far expectations have run ahead in parts of the market.

In currencies, the USD has regained support from the hawkish Fed outlook and AI-driven capital inflows, prompting us to upwardly revise our forecast. We have also lowered our JPY outlook despite BoJ hikes and interventions. The GBP is supported by limited political uncertainty, while the CHF may see less geopolitical support.