# Markets shrug again; the tax burden doesn't _Missiles over the Gulf, the AI darlings of 2026 in sharp reverse, a $5.5bn bid nobody noticed – and a tax burden heading somewhere Britain has never been in peacetime_ Neil Woodford · 17 July 2026 · 9 min read ![Iranian ballistic missiles](https://cdn.sanity.io/images/v3acfbvo/production/ee47040ffce94336f46071c75c3e6192a6fc0f38-5184x3456.jpg?w=1600&fit=max&auto=format) --- Well, the calm didn't really last very long, and after a couple of uneventful weeks in financial markets, the last few days have felt pretty intense. The conflict in the Persian Gulf has intensified, some of the market's most loved AI trades have fallen heavily, the US Q2 results season has kicked off, the economic implications of the political changes in the UK are beginning, very gradually, to emerge (apparently, Ed Miliband will not be the new chancellor, thank goodness), there has been yet another big cash bid in the UK market which as far as I can see has attracted virtually no attention, so accustomed have we all become to the daily routine of the incredible shrinking stock market, important macro data has been released both in the US and in the UK, and China's latest GDP data (for Q2) is the worst in three decades. Keeping this update to a manageable length will be a challenge. _[Watch: Watch this week's episode of The Show — The People Who Got This War Wrong Set Your Interest Rate](https://www.noisecancelling.co/the-show)_ ## The Gulf conflict First to the war in the Persian Gulf. This episode of escalation is serious but has been described by experts as contained. US forces have targeted drone launch sites and radar and other coastal infrastructure along the Iranian coast whilst the Iranians have retaliated by launching missiles and drones at US military bases in Kuwait, Bahrain, Qatar and Jordan. _[Embedded media](https://www.nytimes.com/2026/07/16/world/middleeast/iran-war-us-strikes.html)_ Whilst unwelcome and dangerous, this appears to be deliberately constrained, and, for that reason and others I have written about in recent months, I still believe this is a temporary interruption to diplomacy. I also read today about an internal political conflict in Iran, which I think helps explain what's going on there. Today, Iran's top negotiator has appeared to defend the talks with the US against more hardline factions within the country. He said that negotiating was not "tantamount to compromise" and added that his efforts were "part of a strategy of resistance and the safeguarding of national interests". Importantly, these comments were broadcast on Iranian state TV and were clearly a response to more hardline factions, probably within the IRGC, who have labelled the negotiators as traitors. _(Neil in the margin: The Islamic Revolutionary Guard Corps — Iran's elite military and ideological force, separate from the regular army and answerable directly to the Supreme Leader. It tends to be the hardline faction sceptical of any Western negotiation.)_ This address follows increasing tension between the two factions, with the "pragmatists" apparently prioritising economic recovery whilst the hardline factions are prioritising revenge for the attacks and the killing of Ali Khamenei following his funeral last week. My conclusion remains that this military escalation will be temporary but clearly dangerous, and that talks in earnest will recommence soon. Of course, if there is some kind of explicit power struggle within Iran that leaves hardliners in control, that would not bode well, but for the time being, the probabilities are, I believe, favouring jaw-jaw. ## Financial markets Global markets have witnessed considerable volatility recently, but most notable has been the reversal in fortunes of the most loved AI trades of 2026. SK Hynix, for example, is now down 40% from its peak in the second half of June, and Micron is down 30% from its high. Other similar businesses, like Samsung, have also taken a bit of a battering whilst, interestingly, some of the Mag7 stocks have staged a mini revival. _(Neil in the margin: The 'Magnificent Seven' — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — the megacap US tech names that have driven most of the S&P's gains in recent years.)_ I don't see this as anything other than stock market volatility. It certainly doesn't, to me, reflect a diminution in the prospects of these semiconductor businesses, all of which have announced remarkable results in recent months. A couple of other things stand out this week, given the backdrop of heightened tension in the Persian Gulf and higher oil prices (albeit that $84 Brent is hardly crisis-level – indeed, it is only 2.4% above the average Brent price over the last five years). _(Neil in the margin: Brent crude is the North Sea oil benchmark used to price roughly two-thirds of the world's traded oil. It's the standard reference for European and global pricing, as opposed to the US WTI marker.)_ ![The catastrophe that priced itself away](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-simplicity-jul26-brent-round-trip-957f10c4faf1-light.png) _Look at where the fall begins: the strait was still closed. No ceasefire, no deal. The market solved this before the diplomats did._ The first is that the S&P 500 is just 1% off its all-time high, and the second is that other developed-economy equity markets have rallied this week despite the escalation in the Iran conflict. Seemingly, equity investors around the world are a lot less concerned about the current state of the war and its potential impact on energy prices than many might have thought. Chief amongst those would be the IEA, central bankers and consensus economics. Bond markets have been a little more ruffled by the war than their equity brethren, and yields across the curve have risen, reflecting, in my opinion, the greater attention paid by so-called traders in these markets to the inflation warnings of central bankers (which, in my view, continue to be wrong). _(Neil in the margin: The International Energy Agency, the Paris-based body that publishes closely-watched forecasts on oil supply, demand and prices — hence Neil grouping it with central bankers as a source of energy-inflation warnings.)_ The more moderate Iranian leadership will be paying attention to the lack of panic in financial markets. Along with the fact that this latest escalation in the conflict is attracting far less attention in Western media, the fact that financial markets and energy prices have seemingly shrugged it off will definitely translate into less leverage against Trump. This will definitely play on the minds of those hoping that he might be forced back to the negotiating table by falling share prices and rate hikes. ## US results and inflation _[Embedded media](https://www.thetimes.com/business/companies-markets/article/goldman-sachs-posts-profits-of-66bn-on-back-of-record-trading-income-plrx06cr3)_ In the US, the Q2 results season was kicked off once again by the leading investment banks, nearly all of which have announced bumper profits as a result of the huge number of large transactions in the first half of 2026. For example, Goldman Sachs' investment banking fees grew 55% on the same period last year. The forward-looking statements from these banks also talk of bulging forward order books driven by further IPO and takeover activity, along with, crucially, a supportive regulatory environment. Whilst on the subject of the US market, it seems appropriate to mention the most recent inflation data. Headline inflation in June fell to 3.5% from May's 4.2%, and core inflation fell to 2.6% from 2.9% – rather like the data in the UK, both were well below expectations, reflecting in particular the lack of second-round effects and lower pump prices in June. This was welcome news, especially in the bond market, which now appears to believe that there will not be a rate rise in July. Expectations for an increase later in the year also reduced significantly. ## Burnham's inheritance In the UK, the political fog is gradually clearing as the Prime Minister-in-waiting starts to lift the veil on what he plans to do and who he plans to appoint. Importantly, it now looks like Ed Miliband will not be the chancellor, which is, in my opinion, unequivocally good news. _[Embedded media](https://www.bbc.com/news/live/clywy2n7g4dt)_ Understandably, there is much speculation about what Burnham will do and how radical his policy choices will be. What often gets overlooked, though, in all the excitement, is that he will inevitably confront the very same challenges that Keir Starmer had to grapple with. Chief amongst those will be the Labour Party's refusal to countenance spending restraint, let alone spending cuts, especially in relation to the bloated welfare budget. Given the constraints imposed by the fiscal rules and the discipline exerted by the UK bond market, and presumably by the recognition that taxes have already risen significantly over the last two years and will continue to do so thanks to frozen reliefs (see below), with inevitable consequences for the labour market and growth, the choices he actually confronts are challenging to say the least. In blunt terms, with the credit card already maxed out and government spending already significantly inflated, I struggle to see how, for example, more devolution in the absence of more money delivers anything substantive. What assets can be taken into public ownership whilst there is no money to compensate their current owners, and if Council Tax is to be abolished, what tax will be put in its place, because the £50bn it raises will have to come from somewhere? I am also interested in the proposal to provide business rate relief to the leisure industry, which has been hit by alarming increases, apparently offset by levying higher rates on warehouses – some of which will be owned by companies like Amazon. Thinking this through, I wonder how much of the rate relief ends up in the tenants' pockets. I suspect some will leak into higher rents paid to leisure-industry landlords, and as for higher business rates on Amazon, I suspect that may be passed through to consumers in higher prices. In other words, a well-intentioned policy may end up driving higher inflation, just as this government's minimum wage increases and new labour laws did. _[Embedded media](https://www.telegraph.co.uk/business/2026/07/15/reverse-reevess-tax-raid-oecd-urges-burnham/)_ I am not saying that all is lost and there is nothing that can be done. Not at all. But first and foremost, all decisions must flow from the recognition that the government is already spending too much money. Once that fundamental truth is accepted, then radical policies can be implemented that might enable the economy to grow faster. I would start with the abolition of stamp duty land tax and mortgage market deregulation (that would require Mr Bailey's permission) and would be very careful not to implement any new laws that might raise the rate of inflation. Getting bogged down with ten-year plans for more devolution to drive faster growth (the evidence on which is not supportive), or taking utilities into public ownership with money the government doesn't have, or loading even more regulation on an already over-regulated economy will not work. As the chart below also shows, the tax burden in the UK is already destined to reach levels never before seen in peacetime. ![Tax burden heads for a peacetime record](https://r4at4qm6kmohrtvq.public.blob.vercel-storage.com/charts/chart-uk-tax-burden-peacetime-record-66c0eb65ac7c-light.png) Burnham's reflex to increase them even more will, quite obviously, bump into Laffer-curve disappointment and even slower growth. Surprisingly, on this point, the OECD agrees. On Wednesday this week, in its UK 2026 economic survey, the organisation concluded that the government's repeated tax increases were driving up the cost of living, hurting jobs and slowing growth. It recommended that the new PM reverses the £12.4bn "stealth tax increase" through freezing personal tax allowances and consider reviewing the £25bn increase in employers' national insurance, which it said had driven up inflation. _(Neil in the margin: The idea that beyond a certain point, higher tax rates raise less revenue, not more, because they suppress the activity being taxed.)_ _(Neil in the margin: The revenue raised by freezing income-tax thresholds rather than raising them with inflation — 'fiscal drag'. As wages rise, more people are pulled into higher bands without any headline rate change, hence 'stealth'.)_ Will the new PM heed these warnings? I suspect not. In fact, all the omens suggest he plans to milk the economy even more, which, I am afraid, will once again prove Einstein's definition of insanity—doing the same thing and expecting a different result. ## The incredible shrinking stock market The saga of the incredible shrinking stock market had a new episode this week, which attracted virtually no attention at all. _[Embedded media](https://www.ft.com/content/2aed9949-737b-48dd-81b9-b5f2b5cdeef2?syn-25a6b1a6=1)_ This time, Rotork was the target, which received an all-cash bid from ABB, the Swiss multinational engineering business. The agreed bid, which on this occasion came in at a "modest" 60% premium to Rotork's average price over the last three months, valued the business at about $5.5bn. Does anyone care? Does Andy Burnham know what the UK stock market is? Is the Treasury worried? Has the governor of the Bank of England noticed? Is the FCA watching? Given that this substantial bid attracted virtually no media attention, sadly, I suspect this is not on any of these folks' radar at all. It should be on every UK investor's mind. ## Macro data Finally, it's been a busy period for important macro data. In China, Q2 GDP data at 4.3% was quite a bit weaker than expected. In fact, it was the lowest reading for a quarter in three decades, apart from during the pandemic. Once again, the weakness was in retail sales and fixed-asset investment, which fell 5.7% year on year for the first half of 2026. Goods exports, not surprisingly, were strong, as was industrial production. And in the UK, May GDP data came in a bit better than expected at 0.1%, leaving the three-month figure to May at 0.7% rather than the 0.5% expected by consensus. Construction and industrial output were both weak, but manufacturing and services were better than expected. ## What to look out for next week In the UK, it's an important week, with labour market data on Tuesday, June's inflation data on Wednesday and retail sales numbers on Thursday. Thankfully, it's a relatively quiet week for US macro data. Aside from that, the Q2 results season gets into full swing, and there will be a lot of results to keep on top of on both sides of the Atlantic. I expect to be busy!