Market & Economic Update - October 2026

Quarterly Highlights:

• Global share markets delivered modest gains over the September quarter, despite a more challenging backdrop as the period progressed. Resilient economic conditions and company earnings supported markets, while persistent inflation and renewed Middle East tensions pushed oil prices higher. Interest rate concerns also increased, particularly in September when both the US Federal Reserve and Reserve Bank of Australia raised rates. Despite these pressures, share markets held up relatively well.

• Australian shares moved modestly higher, led by healthcare, energy and materials. Healthcare benefited from improved company results, while higher oil prices supported energy companies and stronger copper and gold prices helped materials. In contrast, technology, property and consumer discretionary companies weakened as higher interest rates and bond yields created a more difficult environment for these parts of the market. Smaller companies also lagged their larger peers.

• International shares also delivered modest gains, with the US and Japan among the stronger major markets. US shares benefited from strength in AI-related technology, while Europe weakened as higher energy costs and interest rate concerns weighed. Emerging markets were mixed, with China and Taiwan advancing but India and South Korea declining, while larger companies generally outperformed smaller peers.

• Australian and global fixed interest markets declined as government bond yields rose over the quarter. Persistent inflation and expectations that interest rates could remain higher for longer weighed on bond prices, particularly towards the end of the period. Australian corporate bonds held up relatively well, helped by higher short-term interest rates, while global corporate bonds were weaker as investors became more cautious.

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Market Observations and Outlook

The global economic expansion remained intact over the September quarter, supported by healthy manufacturing and services activity. Importantly, this cycle continued to be driven less by traditional consumer spending and more by business investment and powerful structural themes. Artificial intelligence, infrastructure, defence, energy security and more resilient supply chains attracted significant capital, helping support economic growth as household spending moderated.

At the same time, government bond yields rose sharply over the quarter as large fiscal deficits, increased government borrowing and persistent inflation kept interest rates higher. Rather than causing a broad economic slowdown, higher borrowing costs increasingly separated stronger businesses from more vulnerable ones. Large US technology companies remained well placed, with strong cash flows supporting continued investment in AI, while more highly indebted and lower-margin businesses faced greater pressure from rising debt costs.

The consumer also remained increasingly two-speed. Cost-of-living pressures and fading pandemic-era savings caused more indebted households to reduce discretionary spending. Meanwhile, wealthier and less indebted households continued to spend, helping overall consumption remain resilient despite growing pressure beneath the surface.

Australia faced a more challenging backdrop. Higher interest rates and cost-of-living pressures weighed more heavily on households, while earnings growth outside resources and parts of the banking sector remained subdued. Unlike the US, the Australian share market has less exposure to the technology and structural growth themes helping offset the impact of higher interest rates globally, increasing the importance of careful company selection.

Looking ahead, continued economic growth and structural investment provide reasons for optimism, but higher bond yields, uneven consumer conditions and demanding valuations leave less room for disappointment. This environment favours diversification, earnings quality and valuation discipline, while higher bond yields offer improved income and potential portfolio protection if economic growth slows.

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