Stock Market Economic Commentary May 2026

The UK Bond Market

“Money for Nothing” – Dire Straits, Brothers in Arms, 1985.

The UK government is now spending well over £100 billion a year on debt interest, accounting for almost 10% of total government spending and equivalent to about twice the amount we spend on defence.

This high number is a product of both the high levels of outstanding debt and the relatively high interest rates that are required to compensate investors, both international and domestic, for buying and holding UK government debt.

Recent rises in gilt yields, combined with downgrades in predicted growth, mean we cannot be confident this burden will ever fall, particularly while there is significant uncertainty about the current Government leadership and economic strategy.

The UK has a lower national debt to GDP ratio than, for example, both France and Italy, but while we currently pay more than 5% on 10-year gilts, France and Italy pay only around 3.6%. Our interest bill would fall by almost one third if we could match their rates, saving UK taxpayers around £30 billion a year.

Mark Carney, the governor of the Bank of England at the time, remarked nine years ago that the UK relies “on the kindness of strangers”, with international investors holding almost 30% of our national debt.

The bond market is watching. It can smell weakness and incompetence or just a basic lack of understanding, a mile off. Whether we like it or not, if the bond market rejects the government’s approach to public finances, bond vigilantes will push our borrowing costs ever higher.

So, in the spirit of trying to avoid a painful market shakeout, here are some top tips for what aspiring political leaders should say when bond investors are on the prowl.

The first is that bonds are our friends. We want you, we love you, we need you!

Governments have three ways to fund spending:

1) Sell off national assets, which doesn’t get you far. Gordon Brown famously sold all our gold reserves in the years 1999-2002 at a weighted average price of only $275 per troy ounce, which raised $3.5 billion, compared to today’s value of over $57 billion!

2)Taxing people and businesses, which they generally don’t like much. With the UK’s tax burden already at a post-war peak of almost 40% of GDP, there is little scope for further tax rises.

3) Through the miracle of capitalism, borrow billions from investors, but at what cost? Certainly not money for nothing,

Most governments rely on a mixture of options two and three.

It is tempting to blame the bond market for our woes; whinge that it hampers our options, wail about fat cats and city-wise boys bossing elected officials around. Some prospective leaders have even made noises about not wanting to be “in hock” to the bond market.

But if you don’t play by the rules of the bond market, you have to gather pretty much every penny you spend through taxation. Try getting that past the public on general election day.

Bond investors hate certain things. One is inflation, which eats into the bond’s value over time. Another is excessive borrowing. If a government floods the market with loads of bonds, the value of those bonds will fall. Weaker bonds mean even higher borrowing costs for the government, for businesses, and for anyone paying off a mortgage.

Bond investors like growth and stability. They like boring. Calm bond markets mean more money for public services. It’s not a gift to tawdry speculators, it’s a public good.

Another key thing for British politicians to remember is that we are big borrowers as a proportion of the economy, but we are small on the global stage. The UK bond market, known as the “gilt market”, is a toddler in comparison to the US equivalent, known as treasuries, which bosses the global bond market around.

If Treasuries stumble for any reason, such as a rise in inflation expectations due to a war of choice in a major oil-producing region, UK gilts are powerless to resist being pulled that way. UK gilts are rather more sensitive to global vulnerabilities than other comparable markets.

Another thing about being small is that foreign investors are people too. They have a choice about whether they buy UK gilts, which are mostly denominated in sterling, a volatile currency. And they remember the gilt market bonfire in late 2022 after the Liz Truss mini-budget, all too well.

It is wise to avoid giving the bond market reasons to worry about the risk of falls in the bond’s value or in the currency and give it reasons to believe that the money we borrow will make the country stronger over time. They like to see money being spent on real things like infrastructure rather than just paying off existing debts or paying interest. They like to see investment. They crave economic growth.

A final top tip is that no politician should imagine he or she is the chosen one who can face down the bond market. Trust me, that just isn’t possible. Liz Truss famously found this out the hard way, and even Donald Trump was forced to rethink his global trade tariffs last year after the US bond market baulked.

The days of “money for nothing”, or even cheap money, are long gone. The bond market imposes constraints but fighting it is like trying to fight the weather. Wild statements about borrowing and spending and an uninformed hostile relationship with the bond market from any part of the political spectrum are a choice and a bad one at that. A restive gilt market sets the limits of power and is ready to punish any deviation from fiscal discipline.

The paradox of 2026

“The market is better at predicting the news than the news is at predicting the market.” Gerald M Loeb (1899 – 1974), prominent Wall Street stockbroker and investment banker.

As we approach the halfway point of the year, investors could be forgiven for being driven to distraction. Stock markets are always noisy, buffeted by a cocktail of macroeconomics, geopolitics, and company-specific news, yet it is hard to recall a period when prices have been impacted to such an extent by widely differing factors.

The war in Iran has provided the fourth material supply shock for the global economy this decade, following the pandemic in 2020, the invasion of Ukraine in 2022 and tariffs in 2025. Central banks struggling to achieve their inflation targets are facing the spectre of stagflation once again.

This is confirmation, if it were needed, that the 2020s are proving a more inflationary decade than the 2010s.

The military conflict in the Middle East has caused a surge in energy prices, serious disruptions in maritime supply chains and a mounting risk of global recession. Populism, nationalism, and angry polarisation are rising in the West, debt burdens are sky high, climate change is accelerating, and the AI revolution that so thrills the Silicon Valley titans is threatening to destroy jobs.

But these negatives are only one side of the story. Stock markets are in shrug-off mode despite all the chaos. There is value in embracing adversity, and for good reason. Welcome to the paradox of 2026.

We live in a golden age of science, which is not only unleashing a widely discussed revolution in AI but also less noticed miracles in life sciences and green tech. The global economy is still growing at more than 3% a year, and most surprisingly, America’s stock market has recently been hitting record highs. European, UK, and Japanese equity indices have had a rockier ride but are also fairly buoyant.

There are risks galore. There always are, but risks go both ways. Company earnings drive stock market indices, and Société Générale has calculated that US forecast earnings are already $600 billion above where they were at the start of the year.

The apparent disconnect between economic and geopolitical risk and the performance of equity indices may seem paradoxical, but it is, if anything, normal. What is good for an economy can have little if any effect on its equity market, and vice versa. Stock markets don’t always move in step with the economy.

The major indices, such as the FTSE 100, the S&P 500, and the German DAX, are dominated by a small number of large, multinational companies. Most of what drives GDP growth – such as the activities of unquoted businesses which employ the bulk of the workforce and public sector activity, along with wages and salaries – is not captured in equity indices.

Swathes of economic activity play no role in equity markets. There are 5.3 million registered UK companies, but only 0.1% are quoted on the stock exchange and play no part in the performance of a stock market index.

Equity indices also exaggerate the importance of a handful of sectors. Soaring valuations in a sector that makes up a small share of GDP give it outsize weight in an equity index. Technology accounts for more than a third of the S&P 500 index but only represents about 10% of the US economy.

Whereas GDP measures what is produced within a country’s borders, equity markets capture the sales of constituent companies wherever they take place. The UK FTSE 100 has long been seen by international investors as a play on global markets, and never more so than today, with foreign revenues accounting for three quarters of FTSE 100 earnings. The trade intensity of GDP is lower in the US than in the UK, but about a third of S&P 500 earnings come from outside the US.

There are other important differences.

First, GDP measures current economic activity while equities reflect what investors are prepared to pay for future earnings, which itself depends on expectations for earnings, inflation and interest rates.

Second, fast-growing economies need more capital, which often takes the form of companies issuing new shares. Strong GDP growth boosts company earnings, but these are spread across a growing number of shares. Existing shareholders lose out, depressing valuations. Such earnings dilution helps explain why equity returns in China have underperformed those in many Western markets where companies, far from issuing new equity, have been buying back shares to bolster earnings and valuations.

For a host of reasons, history is littered with examples of equity markets going up in the face of less-than-spectacular rates of domestic growth.

US equities have delivered higher returns than Chinese equities in the last 30 years, despite the size of the Chinese economy increasing ten times faster than America’s. UK GDP has risen by only 2% since January 2025, while the broad equity market has risen 28%. Despite a raging pandemic and a shrinking economy, US equities ended 2020 up 16%, buoyed by collapsing interest rates and expectations of a strong recovery.

Equity markets perform a host of economically important functions, and their performance provides vital insights into the financial economy, but they have much less to say about the performance of underlying economies. Stock markets move on expectations, sentiment and “what might happen next”, not simply on today’s economic reality.

And finally, one other important reason for the disconnect may simply be that the US President, Donald Trump, is obsessed with stock markets. True, his predecessors such as Joe Biden and Barack Obama also watched the equity markets, but it has been widely reported that Mr Trump thinks “the stock market is his scorecard more than any president before him”. Hence, the popularity of the so-called “Taco” concept coined by the FT’s Robert Armstrong. According to the FT, the idea is now widespread on Wall Street that “Trump always chickens out” and if stock markets fall, he is likely to change his policy to boost share prices again.

As always, we thank you for your continued support, and we look forward to updating you regularly throughout 2026.

Please click here to access The Clarion Investment Diary for May with full details of the Clarion Portfolio Funds, including performance statistics.

Keith W Thompson

Clarion Group Chairman

May 2026

Risk Warnings

Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.

The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.