From oil spikes to AI rallies: Why 2026’s market rebound feels fragile

Dr Mark Azzopardi, Chairman of the Investment Committee for Merill SICAV plc and Portfolio Manager for the Merill Funds, explains why markets have become increasingly difficult to read in 2026.

The first four months of 2026 have been extremely volatile. What changed in the market environment so quickly?

The year started positively. Inflation appeared under control, bond yields were falling, and equities were trending upwards in an orderly fashion. We were expecting another strong year for both asset classes. Then, towards the end of February 2026, the Iran war changed the picture completely. Markets immediately started repricing risk as investors tried to assess whether the war would be prolonged or contained.

The biggest concern quickly became inflation, but this time the inflation story is very different from what we saw after COVID and during the Ukraine war. Back then, inflation was largely driven by excess liquidity and strong demand because governments and central banks had flooded economies with money. Today, the issue is more supply driven, particularly through oil and raw materials. The risk now is whether those higher costs begin feeding into wages and broader inflation across the economies.

Despite the volatility, Artificial Intelligence (AI)-related stocks have surged again. What is driving that rally?

The ceasefire optimism triggered a major rebound in AI and semiconductor stocks. Companies linked to AI infrastructure have performed exceptionally well, with some semiconductor names posting very strong gains. However, this rally has masked weakness in the wider market. Outside AI, oil and some industrial names, as well as many sectors are still trading below their pre-war levels.

Investors regained confidence in the AI story after momentum appeared to fade in 2025, while semiconductor earnings came in much stronger than expected. That proved demand is still accelerating rather than slowing down. Memory chip manufacturers have benefited enormously because more advanced AI models require greater computing and storage capacity.

At the same time, valuations are becoming stretched. Some companies are trading at extremely high multiples that go beyond what many medium-risk investors would normally tolerate. Still, we are already past the stage of questioning whether AI is essential. The challenge now is identifying which companies will monetise it successfully and which business models could eventually be disrupted by it.

Not all technology companies are benefiting equally from AI. Where are you seeing the biggest divide?

The biggest divide we are seeing is between companies enabling AI and companies potentially threatened by it. We have preferred semiconductor and infrastructure-related technology businesses because they are direct beneficiaries of AI investment. Companies like Nvidia, Broadcom and Alphabet are monetising the trend very effectively.

On the other hand, software-as-a-service (SAAS) companies have faced growing pressure because AI could eventually erode their competitive advantage. Investors are beginning to reassess whether certain subscription-based software businesses will still justify their future earnings projections.

However, not every company should be treated the same way. There were cases where markets overreacted. London Stock Exchange Group, for example, was sold off alongside broader software businesses despite having strong data and infrastructure revenue streams that are less vulnerable to AI disruption. We saw that as a mispricing opportunity.

Which sectors outside technology have stood out during this period?

Energy and certain industrial names have performed relatively well, particularly companies linked to electrification, energy infrastructure and nuclear power development. Schneider Electric is one example we continue to view positively because electrification remains a structural growth area regardless of short-term volatility.

Interestingly, defence stocks did not perform as many expected despite the escalation in geopolitical tensions. In fact, many defence companies fell sharply. Part of the reason is concern about production capacity and whether manufacturers can replenish military equipment quickly enough. There is also a growing realisation that cheaper technologies like drones are changing modern warfare significantly.

On the weaker side, consumer discretionary companies, luxury brands, autos and healthcare struggled. Luxury brand names were hit by weaker demand and logistical pressures, while healthcare surprisingly underperformed throughout the conflict period.

How have the bond markets reacted to the conflict and inflation fears?

Bond markets have been extremely sensitive to inflation expectations and geopolitical developments, but our funds performed well because we managed duration carefully and maintained a strong tilt towards investment-grade credit.

Markets quickly moved from expecting interest rate cuts to pricing in the possibility of future hikes, particularly if inflation becomes more entrenched. That repricing created volatility, especially at the shorter end of the yield curve.

The positive difference compared to 2022 is that today bonds already offer much higher income. Back then, interest rates were near zero or negative. Today, portfolios are generating stronger coupon income, meaning returns are increasingly driven by income rather than relying purely on capital appreciation.

We have observed the  Merill High Income Fund (the ‘Fund’) to continue performing strongly, outperforming on a year-to-date basis much of the wider high-income market while maintaining lower drawdowns during periods of volatility. The Fund also benefited from exposure to currencies like the Australian dollar, Norwegian Krone, Singapore Dollar and Brazilian real.

What could shift markets over the next few months?

We believe that the biggest catalyst for change over the next months would be a credible peace agreement and a normalisation of oil markets. If the situation within the Strait of Hormuz stabilises and geopolitical tensions ease, we would likely see a broad rebound across sectors that have underperformed since  the conflict.

We are also closely watching currency movements and commodity markets. Volatility in oil has been amplified not only by geopolitics but also by algorithmic trading and speculative positioning.

At the same time, markets have become remarkably resilient over recent years. Investors have already lived through COVID, the Ukraine war, tariff disputes and now the Iran war within a relatively short timeframe. That constant cycle of disruption means investors have become more accustomed to volatility, even if it remains extremely challenging to navigate in real time.

This interview is held with Dr Mark Azzopardi – Director and Portfolio Manager at Jesmond Mizzi Financial Advisors Limited (JMFA). This interview is intended for general information purposes only and does not constitute investment advice, or an offer, invitation to buy or sell any financial instruments. The Company is licensed to conduct investment services business by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. The directors or related parties, including the Company and their clients, may have an interest in securities mentioned in this interview.
Merill SICAV plc is incorporated and licenced as an open-ended collective investment scheme, authorised and licened by the Malta Financial Services Authority (MFSA), qualifying as a Maltese UCITS in terms of the UCITS Directive. The Fund is self-managed but has delegated the day-to-day investment management of the sub-funds to JMFA, who will also promote and distribute the Fund. Potential Investors should read the Prospectus / Offering Supplement / KID before making any investment decision in order to fully understand the potential risks and rewards associated with an investment in this Fund.
For further information contact Jesmond Mizzi Financial Advisors Limited of 16 Central Business Hub, Level 3, Mdina Road, Attard, Malta, on Tel: 2122 4410, or email [email protected].