Rates are rising everywhere. Here is what to do with your portfolio now

The bond market is sending a warning

A global bond rout is underway — 30-year US Treasury yields crossed 5.16% on 18 May 2026, a one-year high, as markets priced a greater than 50% probability of a Fed rate hike by December. The European Central Bank (ECB) is seen hiking as early as next month and the Bank of England (BOE) is expected to move twice this year. Equity markets are under pressure: the S&P 500 dropped 1.24% on Friday as bond market reality broke through weeks of AI-driven optimism, with losses extending into Monday despite President Trump signalling the US would hold off on new Iran strikes.

The fear is straightforward. If inflation stays high, central banks raise rates — and higher rates make borrowing more expensive, squeeze company profits, and make stocks less attractive relative to bonds. Stock markets that recently hit record highs could sell off sharply.

This article explains what is driving the inflation fears, how serious the risk is, and what to do with your portfolio now.

Inflation is structural. Rate hikes are global.

We agree with the bond market on two things.

First, inflation is structural rather than transient — and it is a global story, not a US one. Similar inflation readings emerged across China, Germany and Japan in April, and the shock has spread well beyond the petrol pump. Rent, healthcare, airfare, and dining all carry energy costs embedded somewhere in their supply chain. Food prices tell the same story: fruit and vegetable prices rose 6% year-on-year in April's CPI, with tomato prices up nearly 25%. The driver is not a shortage of produce — it is energy costs running through every stage of the food supply chain, from fertiliser and diesel for farmers to petrochemical packaging and refrigerated transport.

Core producer prices rose 1.0% month-on-month — the largest monthly gain since March 2022, and well above the 0.4% forecast.

More importantly, oil prices themselves are unlikely to fall far or fast even if a deal materialises — Iran has made clear it intends to retain a degree of control over the Strait of Hormuz regardless of any ceasefire, meaning the waterway that carries a significant share of the world's energy supply will trade under a permanent geopolitical risk premium. A ceasefire does not unwind any of this.

Second, rate hikes are coming — and not just in the US. The ECB is seen hiking as early as next month, the BOE is expected to move twice this year, and the Bank of Japan — which held rates steady at 0.75% in April — is widely expected to raise to 1.0% in June. Three of its nine board members already dissented in favour of an immediate hike, and nearly all economists surveyed by Reuters expect a move by end-September.

The signals from within the Fed are the most telling: at the 29 April Fed meeting, three regional presidents — Beth Hammack of Cleveland, Lorie Logan of Dallas, and Neel Kashkari of Minneapolis — dissented from the Fed's signal that its next rate move would be a cut.

Hammack noted that consumer price inflation — as measured by the Fed's preferred PCE index — had already risen from 2.8% in February to 3.5% in March before the full energy shock had worked through.

Kashkari went further: even in a benign scenario where Hormuz reopens quickly and oil falls to USD 88 by year-end, he still projects inflation at 3% for a third consecutive year. The Fed has not hit its 2% target in more than five years.

The inflation shock that began in the Middle East has become a global monetary policy problem. Yet equity markets have shrugged it off — the S&P 500 hit record highs as recently as 14 May 2026.

Does that make equity markets irrational?

The earnings case is real and we are not dismissing it. First-quarter S&P 500 earnings are on track to rise 25.1% year-on-year — the strongest quarterly growth since 1Q 2022. Around 85% of companies exceeded earnings expectations, one of the strongest periods of positive earnings surprises since the pandemic, with ten of eleven S&P 500 sectors on pace for higher first-quarter earnings. The breadth of the semiconductor beat is telling — even Intel, long the sector's most challenged name, exceeded expectations. When demand is strong enough to lift the laggards, it is not a concentrated trade. It is a structural cycle.

This is a rally built on genuine earnings, not speculation — and that distinction matters. Speculation-driven rallies tend to collapse when yields rise, as the entire investment thesis evaporates simultaneously. Earnings-driven rallies are different. Higher rates mean investors can earn more from bonds without taking on equity risk, so the price they are willing to pay for every dollar of earnings falls — valuation multiples compress. But the earnings themselves remain. The result is a correction, not a crash. The correct response is to reposition, not retreat — and Asian markets, offering comparable earnings growth at a fraction of US valuations, are where that repositioning begins.

A potential resolution between the US and Iran adds a further catalyst. Both sides remain engaged via Pakistani mediation, and the pressure bearing down on each — Iran's economic pain, Trump's domestic political clock — makes some form of agreement probable. We are not arguing the deal is imminent. We think it is coming. And when it does, markets that have been pricing risk could quickly reprice optimism.

Three things to do. In this order.

1. Don't panic sell.

Oil prices are high, rate hikes are coming, and the conflict may escalate. Every one of those things has been true before — in 1973, 1979, 1990, 2008, and 2020 — and markets recovered every time. The most recent example is the closest parallel. In 2022, the Fed's most aggressive rate hike cycle in four decades drove the S&P 500 down 18.1%. The correction ran its course — and back-to-back total returns of 26.3% and 25.0% followed in 2023 and 2024, one of the strongest two-year recoveries in a generation.

2. Reposition — don't retreat.

Reduce the rate sensitivity of your portfolio. Loss-making tech companies, REITs, and high-multiple growth names are the most vulnerable to rising rates — their valuations rest on distant future cash flows that become less valuable as rates rise. High-quality tech names with strong balance sheets and resilient earnings are a different story. Rotate toward those. Rotate away from the names where the valuation depends on a future that rising rates are making more expensive.

Underweight US equities and add to Asia. At 22.0x forward earnings, the S&P 500 is pricing in perfection — the MSCI Asia ex Japan index is not, trading at 13.2x forward earnings — a significant discount across markets with genuinely different structural drivers. 

Korea and Taiwan sit at the centre of the AI infrastructure cycle — Samsung and SK Hynix generated first-quarter operating profits that rose more than eightfold and fivefold year-on-year respectively, with 2026 supply already sold out and shortages that industry executives expect to persist until 2030. Japan's corporate governance overhaul is unlocking shareholder returns that have been trapped for decades.

Singapore's banks are proving resilient despite margin pressure — and if rate hikes arrive as the bond market is pricing, that pressure reverses into a direct earnings tailwind. China's technology sector is no longer a recovery story. Tencent's advertising revenue grew 20% year-on-year on AI-driven targeting improvements, while Alibaba Cloud's AI-related revenue now accounts for around 30% of external revenue — up from low single digits two years ago.

The Global X Asia Semiconductor ETF (HKEX:3119) remains our preferred vehicle for AI infrastructure exposure. For investors looking for an underappreciated opportunity within the Asia theme, the WisdomTree Asia Defence Fund (NYSE:WDAF) captures the Indo-Pacific rearmament cycle — a structural, policy-driven story that most portfolios have no exposure to.

Chart 1: Asia offers comparable growth at lower valuations

Hold Europe selectively — not broadly. Broad European equity exposure faces the same rate repricing risk as the US, but two structural stories remain intact regardless of what happens in Hormuz. European defence spending is a policy-driven, multi-year commitment — budgets are locked, procurement cycles are underway, and earnings visibility is real. The WisdomTree Europe Defence UCITS ETF (LSE:WDEF) offers direct exposure to this cycle. European banks are direct beneficiaries of a higher-for-longer rate environment, with net interest margins improving with every ECB hike.

For fixed income, rotate into short-duration bonds. Not all bonds behave the same way when rates rise — long-duration bonds are among the worst places to hide, as their prices fall hardest when yields climb. Short-duration bonds are different: their holdings mature quickly, returning capital that can be reinvested at whatever the prevailing — and rising — rate happens to be.

3. Start or continue your RSP.

A regular savings plan — investing a fixed amount every month, through the drawdown and through the recovery — works across all three scenarios: deal or no deal, Hormuz open or closed. The investors who benefit most from the eventual recovery are the ones who stayed invested through the uncertainty, in the right assets. Whether oil prices spike further or rates rise faster than expected, a disciplined and systematic approach to investing is the most reliable way to build long-term wealth through uncertainty.

Table 1: Recommended products

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds positions in iShares Hang Seng Tech ETF and Global X Asia Semiconductor ETF.