Market & Economic Update - January 2026

Quarterly Highlights:

• Global markets delivered mixed but generally resilient outcomes over the December quarter, as investors navigated shifting expectations for interest rates, valuation pressures and ongoing geopolitical uncertainty. Early volatility gave way to steadier conditions toward year end, supported by the US Federal Reserve’s December rate cut and continued confidence in corporate earnings. Artificial intelligence remained a key structural theme, while strength in defensive sectors, commodities, and gold helped balance a more selective risk appetite.

• Australian shares were volatile over the quarter, ultimately finishing modestly lower. Stronger-than-expected inflation and economic data led markets to reassess the outlook for monetary policy, weighing on interest-sensitive sectors. However, support from materials, underpinned by firmer commodity prices, and the relative stability of financials helped cushion broader market weakness. Smaller companies held up comparatively well, assisted by strength in resource-exposed segments.

• International share markets posted positive results overall across the quarter. Developed markets led gains, with the US and Europe supported by steady earnings and easing policy expectations. Asia was more mixed, with Japan continuing to outperform on improving domestic conditions and clearer policy direction, while emerging markets performed well despite China lagging amid softer sentiment.

• Fixed interest markets delivered mixed outcomes over the period. Global bonds stabilised as central banks adopted a more accommodative tone, supporting returns toward year-end. In Australia, rising yields weighed on local fixed interest as expectations for near-term rate cuts were pushed back. Credit markets remained supported by resilient corporate fundamentals, with higher-yielding segments benefiting from ongoing demand for income.

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Market Observations & Outlook

Market sentiment improved through the December quarter, with most global share markets recording modest gains despite intermittent volatility. Pockets of weakness, particularly in parts of the US technology sector, eased toward year end following the US Federal Reserve’s December rate cut, supporting confidence in a more stable policy outlook. Gains were measured rather than exuberant, reflecting ongoing sensitivity to growth, inflation and valuation considerations, while investors remained selective and focused on earnings quality.

Looking ahead, the macro environment remains broadly supportive. Inflation has moderated across major economies, and corporate earnings momentum remains solid, even amid policy uncertainty, higher tariffs and softer patches in economic data. However, monetary and fiscal policy are diverging. The US Federal Reserve is expected to ease gradually, whereas inflation in Australia has proven more persistent, limiting the scope for rate cuts. This policy dispersion is influencing bond markets and creating opportunities in fixed interest, with Australian fixed interest offering relatively greater stability and more attractive risk-adjusted outcomes than the US.

Several opportunities remain evident. Investment linked to AI remains a key structural driver, with unprecedented capital spending offering the potential for productivity gains over time. Beyond the largest US technology companies, industries that facilitate AI adoption may also benefit. Interest rate-sensitive segments, including global small companies, infrastructure and property, are priced at or near long-term averages, appearing relatively attractive compared with other equity asset classes trading at higher valuations.

At the same time, risks remain. Equity valuations are elevated, leaving little room for disappointment should earnings momentum slow. While inflation has eased, the risk of renewed upward pressure in the US remains material, reflecting tariffs, high government debt and ongoing liquidity support. Policy uncertainty surrounding US trade measures and the risk of excessive investment in AI-related capital expenditure may also contribute to periods of market volatility.

In this environment, returns are likely to be more uneven and selective, reinforcing the importance of diversification, discipline and a continued focus on fundamentals as investors navigate 2026.