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.

Australian share market and economic performance

Australian shares produced a modest return of 6.1% during a challenging year which included inflation running above target, higher fuel costs, due to the Iran war, and a tightening of CGT and negative gearing rules at the May budget. The economy’s lack of productivity and energy security issues were exposed during the year. The RBA had to tighten interest rates considerably to slow inflation, while the government scrambled to secure fuel supply from Asia. One positive was that a cut in the fuel excise tax helped keep fuel prices under control.

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.

The Australian market currently trades on a FY26 P/E of 18.2x, with forecast EPS growth of 14.2%. Most of that growth is attributable to the Materials and Energy sectors, with growth outside those sectors generally in the single digits. Moving forward, lower fuel prices and an economic slowdown should see inflation retreat, which should allow the RBA to ease interest rates in 2027. We expect the outlook to gradually improve, assuming fuel prices remain under control.

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 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.

Global shares (unhedged)

Global shares (unhedged) returned 14.9%, while global shares (hedged) returned 22.2%. The AUD/USD rallied 3 cents over the year to US$0.69, which lowered unhedged returns. Global returns were led by Asia (+36.6%) and the US (+16.3%), while Europe lagged (+11.0%).

The US market (74% of global market) hit some turbulence in March/April 2026 after the Iran war saw oil prices spike to over US$100/bbl. But subsequent efforts to find a ceasefire agreement saw the oil price retreat and the technology theme reassert itself. US markets rallied to record highs by mid-year, allowing Elon Musk’s SpaceX to successfully list with a US$2 trillion market capitalisaiton.

The US market currently trades on a 2026 P/E of 23.1x, with forecast EPS growth of 23.8%. The market looks fairly valued based on earnings assumptions, but the key risk is can companies, particularly the technology sector, deliver on the high expectations that have been built into market valuations? We expect the exuberance around the technology sector to persist in the short term but eventually the market will need to see growth in real earnings and cashflow rather than just revenue. That is the major risk as we see it for both US and Asian markets.

Global wrap

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.

Speak with an LDB advisor

At LDB, we focus on helping clients navigate uncertain markets with perspective and confidence. While we can’t predict how long this situation will last, we can help ensure your investment strategy remains aligned with your goals, time horizon and risk tolerance.

It’s during times like these that good advice matters most, helping clients stay focused on the long term, manage volatility and, where appropriate, take advantage of opportunities created by temporary market dislocation.

Call us on (03) 9875 2900 or get in touch online to discuss your situation. You can also follow LDB on LinkedIn for updates on markets, tax, and financial advice.