Global markets proved more resilient than many feared – a validation of our view that the solid foundations of earnings and economic growth would withstand the Gulf War shock. Global equities rose to new all-time highs in the face of an energy shock (that proved shorter than feared), remarkably resilient company earnings across many sectors (beyond just those exposed to the AI capex boom) and supportive fiscal and monetary policy settings.
Energy prices traversed a remarkable round-trip with three distinct regimes in the first half of 2026: abundance, scarcity and in more recent times abundance. The global economy navigated a move up in oil prices to $126 per barrel and back to $71 barrel within a single quarter without a recession or a financial accident. This speaks to the durability of the underlying cycle and supportive tailwinds if energy prices remain subdued.
Following a very positive period for markets we may now be entering a more complex environment. There are some important questions arising: whether the AI capex cycle will deliver its promised returns over the longer term, how much heavy lifting will need to be done by central banks, how much support will come from lower energy prices to address the elevated levels of inflation and support economic growth, and whether Australia’s domestic policy settings across monetary and taxation policy are setting the country up for a long and difficult period ahead. We remain alert to the risks and continue to be focused on constructing well diversified portfolios that allow us to provide strong risk adjusted returns for clients in an environment of ever-increasing complexity.
KEY POINTS
- Global equities delivered strong returns over the quarter as the strong fundamentals across company earnings, AI-driven upgrades to growth expectations and supportive policy, were enhanced by declining energy prices with the Gulf war peace agreement in June.
- The resilience of markets and economies needs to be recognized as they have weathered multiple shocks over the last three years, across a US regional banking crisis, normalization of interest rates, a distinct change in the geopolitical backdrop and the recent energy shock.
- Portfolios have weathered this storm as the volatility hit and have participated in the upside performance that has occurred in a well-diversified way. We remain alert to the risks on the horizon as the cycle becomes more mature.
- Central banks face a difficult path. They are alert to inflation risks although the threat of an extensive rate tightening process is alleviated by energy price moderation, questions on the underlying strength of the labour market and in Australia through the RBA’s pre-emptive moves and the slowing housing market.
- Australia continues to face headwinds from the government’s tax policy, a slowing housing market and prior interest hikes, raising the risk that growth approaches stall speed in late 2026 or early 2027.
- High quality bond and hedge fund allocations have been added over the quarter to add to portfolio breadth and resilience.