Markets – January 2026

Our share market was less volatile over this period because the RBA implemented cuts to interest rates; a cyclical economic recovery was supported by federal election spending commitments; and we enjoyed a perceived safe haven status from the worst of the global trade ructions.

Over the remainder of the year, global markets continued to recover from April’s jitters, driven by ongoing evidence around the strength of the US economy, falls in their inflation rate, significant improvements in US productivity rates, and the expectation of the US Central Bank commencing interest rate cuts.

In Australia, the outlook did not mirror the US. A very tight labour market, poor levels of productivity, and the return of higher inflation meant analysts were predicting Australian interest rates would rise.

This saw our share market underperform over the second half of 2025.

Another key feature during 2025 was the rotation in Australian market leadership away from domestic focused sectors, like financials and consumer discretionary stocks, towards the resources sector.

There was a level of caution in global markets about AI adoption and its disruption impacts. This saw quality software companies sold off aggressively.

What’s ahead in 2026?

Equity markets enter 2026 at an inflection point, where several powerful forces will drive market direction over the year.

The main force is the expectation of interest rate cuts in the US, versus a consensus view in Australia of a return to rate rises over the year.

My expectation is that if we do see rate increases this year, they will probably be later in the year. The RBA will likely want to see a sustainable jump in inflation before there is any move upwards in the cash rate.

Other drivers during 2026 will be how AI and its adoption is viewed. This includes the ongoing discussion of a possible bubble in this sector.

Geopolitics will once again drive markets on a day-by-day basis, particularly with recent US actions in Venezuela, ongoing negotiations around an outcome in Ukraine, and the unpredictability of Trump’s policies.

Investors’ interest in the resources sector was highlighted earlier this month with the announcement of a merger between Rio Tinto and Glencore, which, if successful, would create the world’s largest resource company.

Commodities exposed to the electrification of the economy will continue to attract investor attention, with the inflection point (demand exceeding supply) reached for those linked to key inputs for data centres, electric vehicles, and home battery storage.

Summary

The outlook for the Australian share market over 2026 will be driven by:

• Expectation around movements in our interest rates compared with shifts in US rates.
• Updates from the ABS on the direction of inflation.
• Ongoing rollout of AI investment and some level of clarity around the level of return to investors.
• Investors attracted to the value in many of the sold-down software stocks – WiseTech, Car Group, Xero, etc.
• A continuation of the rotation towards resources, given the resurgence in demand against supply shortages.

Please don’t hesitate to contact me should you have any questions.