Quarterly market update - September 2026

Global wrap

The major story of the September quarter was the material rise in interest rates (the yield curve), which seems to be in response to inflation remaining above target and the knock-on effects of the data centre boom. Most asset classes struggled over the quarter except for Global Equities, which remain supported by the strong growth of US companies.

Higher bond yields have led to minimal returns from bonds (as bond prices fall) while interest-rate-sensitive asset classes such as Property and Infrastructure have moved into negative territory. Equities are also at risk from higher bond yields, but the AI technology theme seems to be offsetting these concerns in the short term.

The reasons for higher interest rates are mostly negative (inflation above target, rising budget deficits and debt) but some see positives (higher yields reflect buoyant growth from the data centre boom, central banks are lifting cash rates to get inflation under control).

Much depends on how high interest rates go and for how long they remain elevated. A resolution to the Iran conflict and a recovery in oil and gas flows through the Strait of Hormuz would go a long way to easing inflation concerns and interest rates.

Clearly, geopolitical risks remain elevated under the Trump Presidency, and one wonders what the mid-term US elections in November will bring. If the Republicans lose power in Congress, what will be the implications for the US President? We can’t know for sure but suspect US policy could get even more volatile in the period ahead! The global outlook is certainly mixed; there is the overwhelming positive of the AI boom surrounded by geopolitical spot fires and the unsustainable trend in budget deficits and government debt.

Australian wrap

Economic growth remains moderate, while inflation continues to run above the RBA’s 2.0-3.0% target. The RBA has lost patience with inflation resulting in another lift in the cash rate to 4.60% - the fourth hike this year. Core inflation remains around 3.5% and has been driven by government spending, a surge in energy costs and poor productivity.

Returns on cash, term deposits and floating rate notes remain quite attractive and even bonds are looking enticing at current yields. However, Australian Property, Infrastructure and Equities have come under pressure from the higher yield curve.

The Iran conflict has exposed Australia’s reliance on imported fuel and is likely to accelerate the energy transition to electricity powered by gas and renewables. The outlook for both the Energy and Resource sectors remains positive but the Property market is facing headwinds in terms of rising interest rates, rising construction costs and changes to tax policy. The slowing housing market is beginning to expose over-extended property developers such as Bathla property group in NSW. In turn, Banks and private credit lenders are facing the risk of lower valuations and higher loan impairments.

Bond yields are also on the rise in Australia, with the 10-year bond yield currently at 5.4%. Higher bond yields increase the cost of government debt and the discount rates used to value investments. It seems the bond market is sending a message that fiscal and monetary policy needs to be tightened.

Australia has a few challenges ahead, not the least is a lack of productivity which is limiting growth prospects and supporting inflation. A resolution to the Iran conflict and lower fuel prices would be a major positive towards bringing inflation back to target. Without that, the RBA could lift the cash rate one more time this cycle, but we suspect a run of soft economic data could keep the RBA on hold in the short term.

Outlook

Current conditions are certainly unusual. Inflation running above target and interest rates rising sharply would normally cause a correction in growth assets. This time around the AI theme and a buoyant US technology sector is keeping global equities at record levels.

Company earnings remain resilient but longer-term risks surrounding unsustainable budget deficits and debt seem to be building. In addition, US policy on trade and the Middle East have been adding to inflationary pressure. The bull case would be for the oil price to retreat and AI to deliver on the major productivity benefits that the market expects. The bear case would be the opposite. The truth is probably somewhere in between and accordingly we stick to our ‘muddle through’ outlook which implies tail risks will be avoided for now.

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 natural events impact financial markets.

Next key events

• Fed meeting – 27/28 October 2026

• Aust. AGM season – October/November 2026

• RBA meeting – 2/3 November 2026

• Aust. Bank reporting season – November 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.