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The second quarter of 2026 saw the US-Iran conflict reach a significant milestone, with both nations signing a 14-point Memorandum of Understanding on 17 June, which included an immediate and permanent termination of military operations on all fronts. Despite this, the backdrop remained fragile, with both sides accusing each other of ceasefire violations. Oil and gas prices rose materially earlier in the quarter, as markets priced in the risk of shipping-route disruption through the Strait of Hormuz, before fully retracing those gains, following the agreement.  

Over the quarter, both the Bank of England and the Federal Reserve kept rates unchanged. In both cases, policymakers acknowledged that higher energy prices linked to the Middle East conflict had complicated the outlook, raising near-term inflation concerns. By the end of the quarter, markets broadly expected both central banks to remain on hold for longer than had seemed likely earlier in the year, with hopes of near-term cuts pared back.

Mega-cap technology companies continued to commit heavily to AI, directing spending towards data centres and the supporting infrastructure. Management teams generally argued that demand for AI services continued to outpace available supply, pointing to encouraging growth in software adoption and productivity gains, as justification for further investment. Notwithstanding this, questions from investors persisted over how quickly such heavy investment would translate into sustainable earnings.

In this update, we consider the events that shaped the second quarter of 2026 and share our thoughts on what we believe this means for UK DC schemes. We also share some research articles at the end that we hope will be of interest to you.

Economic Summary – Q2 2026

US real GDP increased 2.1% (q/q saar) in Q1 2026, up from 0.5% annualized growth in Q4 2025. Headline US inflation increased to 4.2% in May 2026 from 3.3% in March 2026. Core inflation was at 2.9% in May, up from 2.6% at the end of March. The Fed, at its June meeting decided to keep the Federal funds rate to 3.5%-3.75%. The Summary of Economic Projections, dot plot turned more hawkish, with half of participants favouring at least one 25 bps hike in 2026. The median path shows rates unchanged in 2027 and down 25 bps in 2028. 

The UK economy grew by 0.6% (q/q) in Q1 2026 up from 0.1% growth recorded in Q4 2025. Headline inflation in the UK fell to 2.8% in May from 3.3% in March. In its June meeting, the monetary policy committee (MPC) voted 7-2 to keep the policy rate unchanged at 3.75%. 

In Q1 2026, seasonally adjusted GDP decreased by 0.2% (q/q) in the euro area. At its June meeting, the ECB raised interest rates in response to higher inflation caused by the US-Iran conflict. This resulted in a deposit rate of 2.25%. Headline inflation in the eurozone rose to 2.8% in June from 2.6% in March.

Japan’s economy expanded at an annualized rate of 1.8% in Q1 2026, up from 0.7% in Q4 2025, marking the strongest annualized rise in four quarters. In its June meeting, the BoJ raised its short-term policy rate to 1.0% (up from 0.75%), the highest it has been since 1995.

China's GDP grew by 5.0% (y/y) in Q1 2026, an increase from 4.5% in Q4 2025, driven by strong industrial growth, surge in exports, and higher fiscal spending. China's inflation rose to 1.2% in May 2026 from 1% in March. The People's Bank of China's 1-Year Loan Prime Rate (LPR) stands at 3.0%, unchanged since its reduction in May 2025.

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Investment Performance Q2 2026

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Local Currency Return can be considered as the approximate return of a hedged index in the respective markets, excluding hedging costs.

*Property returns are to 31 May 2026 due to unavailability of June data at the time of writing.

  • Global equities rose 13.2% in unhedged sterling terms and 14.1% in local currency terms as sterling appreciated against the US dollar. Returns were supported by improving geopolitical sentiment, resilient earnings, and continued AI-driven optimism. The strongest gains were in emerging Asia, although performance remained concentrated in technology- and AI-sensitive markets.
  • Global government bond yields showed a diverging trend amongst economies. US bonds yields moved higher across the curve. The upside was driven by the Fed’s hawkish stance given a pickup in inflation. However, limited second-round effects led bond markets to price out an aggressive rate hike cycle, especially as the growth story favoured a ‘higher for longer’ narrative.
  • In Q2 2026, sterling strengthened against the US dollar (+0.6%), euro (+1.4%), and Japanese yen (+2.8%). Meanwhile, the dollar index gained 1.2% as rates were poised to stay higher for longer amidst AI-driven optimism. On a 12-month basis however, sterling weakened 3.1% and 0.6% against USD and JPY, respectively, while appreciating 9% against EUR.

What this means for DC Schemes

  • The second quarter of 2026 should result in the majority of DC default growth portfolios delivering in positive territory, amidst risk sentiment turning positive. We estimate that the majority of default growth portfolios will have delivered returns in the range of 10% to 16% over the period. 
  • For lifestyle strategies targeting income drawdown at retirement, the lower risk multi-asset funds typically used in the de-risking phase up to retirement are expected to have positive absolute returns also. We estimate that the majority of these de-risking portfolios will have delivered returns in the range of 5% to 7% over the period.
  • Returns from Diversified Growth Funds (DGFs) varied as usual over the quarter, with core strategies mostly having returns in the range of 7% to 9% while idiosyncratic strategies (which typically have more investment levers at their disposal relative to core DGFs) delivered returns in the -2% to 10% range. Outside of DGFs, some DC schemes are turning to alternative options for diversification, such as infrastructure, protected equity, commodities, and multi-asset credit.  We do note that availability for these types of strategies can be more limited, with platform availability key to whether they may be appropriate for consideration.
  • The Government has announced that it will produce statutory guidance on trustees’ fiduciary duties for DB and DC trust-based pension schemes. For DC trustees, this is likely to be particularly relevant in clarifying how existing duties should be applied when making investment decisions in members’ best interests. While the timing and detailed content are not yet known, the direction of travel is becoming clearer, with further developments expected in months rather than years.
  • Early indications suggest the guidance will provide practical support on how trustees should take account of factors such as systemic risks and members’ future standards of living within the framework of their existing duties. It may also influence how trustees think about areas such as UK productive finance, portfolio design and the oversight of default arrangements. Proactive consideration of these topics and how trustees are likely to respond to the new guidance, in the context of existing portfolios and objectives, will help ensure preparedness to navigate changes and seize opportunities. For more information on how Mercer can support, please reach out to your Mercer DC Consultant.

Mercer Investment Research

The following research papers are accessible via the Mercer Insight Community. If you are not currently registered, you can sign up here. This will give you access to all Mercer investment articles as well as a procured list of articles from fund managers across the industry.

Mercer, July 2026

For further information or to discuss any of the themes contained within this document, please speak to your usual Mercer DC consultant.

Important Notice

This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to any other person or entity, without Mercer’s prior written permission.
Information contained herein has been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party.


This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend.
For the avoidance of doubt, this paper is not formal investment advice to allow any party to transact. Additional advice will be required in advance of entering into any contract.


The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Past performance does not guarantee future results. Mercer’s ratings do not constitute individualised investment advice.

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