Federated Hermes: Weekly Markets Wrap Up 28 May 2026
In this week’s markets wrap-up, our investment teams discuss the broadening of market leadership, the durability of the AI-driven rally, and the policy challenges facing the European Central Bank.
Damian McIntyre, Head of Multi-Asset Solutions Team at Federated Hermes
Broadening Rally Gains Momentum
This year has been remarkable in terms of how market leadership has evolved. We’re seeing the “broadening out rally” we anticipated at the start of the year begin to materialise. At times, different sectors have led the market – for example, technology and growth have performed particularly well since the market bottom. However, when you look more broadly across the year so far, returns have been much more balanced. Value stocks, small caps, and growth stocks in the United States are all up by relatively similar amounts. Expanding the view internationally, emerging markets are also having a fantastic year. They’ve benefited significantly from the buildout of the AI supercycle, which has been a major driver of market performance for the better part of the past two years.
The question now is whether this can continue. We believe we’re still in the middle innings of a longer AI-driven investment cycle, one that could extend through this year and into next. We have revised our S&P 500 target to 8,000 this year and 9,000 next year. Earnings growth has been exceptionally strong – well ahead of historical trends – which has been tremendous to see. It’s a dynamic we expect to persist over at least the next 12 months.
Filippo Alloatti, Head of Financials (Credit), Federated Hermes
ECB Faces Policy Dilemma as Energy Shock Clouds Outlook
The European Central Bank (ECB) is ‘stuck between a rock and a hard place’. The economic impact of disrupted Middle East energy infrastructure is serious and uncertain. Even if tensions were to ease, there is a strong likelihood that oil prices will remain structurally elevated, persisting above $80 which would place sustained pressure on both industrial activity and consumer demand. The knock-on effects would be felt across the European economy, with countries such as Germany and Italy particularly vulnerable to prolonged energy cost shocks.
At the same time, the ECB is contending with the legacy of earlier policy mistakes of keeping interest rates too low for too long after the pandemic. As a result, the central bank is now under growing pressure to respond decisively to inflationary pressures and second round effects. Anchoring inflation expectations has become paramount, and this points towards the need for a 25-basis point rate increase in the near term, potentially as early as June.
Ultimately, the bank’s credibility is at stake. Any hesitation risks undermining confidence in its ability to maintain price stability, which, once lost, would be difficult to restore. The ECB needs to balance growth risks against inflation pressures while reinforcing its commitment to financial and monetary stability in an uncertain global environment.