FY26 market wrap and outlook

Global

Global markets continued to prove resilient during FY26, with global shares and infrastructure assets posting another year of double-digit returns. Markets faced a number of challenges during the year, not the least being the Iran war and surging oil prices, coupled with generally rising inflation.

But subsequent efforts to seek a resolution to the Iran conflict has seen oil prices retreat and the technology theme reassert itself. In addition, the US Federal Reserve (the Fed) has remained very accommodative in not lifting interest rates, despite most measures of inflation being well above its 2.0% target.

It is fair to say that fiscal and monetary policy have generally remained supportive in the developed world and earnings growth has remained resilient. But on the negative side, budget deficits and debt continue to expand and bond yields are on the rise. It seems central banks will need to lift interest rates to reduce inflationary pressure otherwise bond yields could become problematic.

Commodities have been buoyant on the electrification and data centre themes and are a key area of outperformance, along with technology in the US and Asia. Global returns were led by Asia (+36.6%) and the US (+16.3%), while Europe lagged (+11.0%). There was also a large difference between unhedged (14.9%) and hedged (22.2%) returns this year as the AUD/USD rallied for most of the financial year.

Moving forward, the Fed looks to set to tighten interest rates, which has led to some recent USD strength and weakness in commodities. The Iran situation also remains tenuous, although oil prices remain below US$80/bbl to date. A key issue is can the US technology sector deliver on lofty expectations? Particularly at the earnings and cashflow line not just the revenue line.

Australia

The Australian economy faced a number of challenges during the year including inflation rising above target, a potential fuel shortage triggered by the Iran war and changes to CGT and negative gearing tax rules at the May budget. It is fair to say that the economy’s lack of productivity and energy security issues were exposed during the year. The Reserve Bank of Australia (RBA) had to tighten interest rates considerably to slow inflation, while the government scrambled to secure fuel supply from Asia. Fortunately, fuel supply was maintained and a cut in the fuel excise tax helped keep fuel prices under control.

The RBA increased the cash rate from 3.85% to 4.35% during the financial year, as inflation (headline 4.0%, core 3.5%) moved above its 2.0-3.0% target range. Inflation is expected to peak in mid-2026 and ease thereafter as the economy slows and fuel prices ease. Financial markets are currently pricing in less than a 50% chance of one more rate hike in 2026, with cuts expected in 2027.

The Materials (+52.1%) and Energy (+14.5%) sectors dominated market returns, while Healthcare (-36.2%) and Technology (-37.0%) were the largest detractors. Most sectors (outside of resources) struggled in a low growth, high inflation environment with Banks also retreating on a weakening housing market.

Moving forward, the economy is likely to slow but ‘bad news could be good news’ in that inflationary pressure should ease, allowing the RBA to adopt a more accommodative stance. In turn, this should support a broadening in sector performance outside of the Materials and Energy sectors.

Outlook

The outlook has become quite mixed. There are the positives of expansionary US policy and the technology theme against the threat of rising inflation and interest rates. Meanwhile, the Australian economy seems to be facing a few headwinds in terms of tightening fiscal and monetary policy and higher fuel costs, but the commodity outlook remains positive.

Globally, central banks have been slow to react to inflation, and one wonders if this will have unintended consequences in terms of rising angst amongst ‘main street’ and bond yields creeping higher. Both are problematic for the government.

We currently expect a ‘muddle through’ scenario of low-to-moderate growth, moderate inflation and moderate interest rates, with the outlook likely to be heavily influenced by oil prices and inflation. Longer term, the risks seem to be rising around the unintended consequences of easy fiscal and monetary policy (inflation, rising bond yields, currency debasement). There is also a risk that the AI investment boom fails to deliver a decent return on investment.

Key known risks

1. Persian Gulf oil and gas flows remain restricted;

2. Inflation remains above target;

3. Rising interest rates in response to rising inflation and budget deficits;

4. The AI investment boom fails to earn a decent return on investment;

5. Leverage in the private equity/debt space comes undone; and

6. Geopolitics and/or climate change events impact financial markets.

Next key events

• Fed meeting – 28/29 July 2026

• US reporting season - July/August 2026

• RBA meeting – 10/11 August 2026

• Australian reporting season – August 2026

Bill Keenan

Principal, Portfolio Manager

Bill Keenan is the founder of Sunbird Portfolios. Sunbird provides independent advice to leading financial advisers across Australia.

Bill has 30 years’ experience in financial markets and holds a Bachelor of Business in Accounting and a Graduate Diploma in Finance and Investment.

Warnings

General Product Advice - any advice provided in this document, is general in nature only and does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, the reader must consider whether it is personally appropriate considering his or her financial circumstances or should seek independent financial advice on its appropriateness.

Past performance is not a reliable indicator of future performance.