Q2 2026 Financial Market Update

KEY POINTS

• Global share markets recovered from their March quarter decline, encouraged by some normalisation in the oil price.
• Beneficiaries of Artificial Intelligence led equity markets higher over the quarter.
• Australian bond yields declined, despite higher cash interest rates.
• The $A finished higher over the quarter but did weaken in the month of June.

SHARE MARKETS BOUNCE BACK AS OIL PRICES FALL

Despite a continuation of military conflict in the Middle East and the Strait of Hormuz being closed for much of the quarter, global share market sentiment returned to being strongly positive over the June quarter. Progress towards an interim peace deal that was reached late in the quarter saw the oil price progressively decline. The WTI Crude Oil price dropped from $US 101.40 per barrel at the end of March to $US 69.50 by the end of June. As a result, global inflationary concerns subsided, which contributed to the turnaround in sentiment on share markets. As has been the case for much of the past 2 years, it was U.S. technology stocks that made the strongest contribution to share market gains. Overall, the S&P 500 Index was 15.2% higher for the quarter, with the technology sector within the U.S. market gaining 26.9%. Highlighting the wide disparity in performance across stocks and sectors, the more defensively positioned U.S consumer staples and utilities sectors finished in slightly negative territory for the quarter.

Outside of the U.S., Japan also made a significant contribution and was the best-performing major developed market during the quarter, with the MSCI Japan Index recording a gain of 16.7%. Japanese companies linked to technology, automation and advanced manufacturing continued to benefit from strong global capital expenditure trends.

Performance across emerging markets was mixed, with exceptionally strong gains being recorded by the semi-conductor and chip manufacturers in South Korea and Taiwan in response to ongoing high rates of Artificial Intelligence related expenditures. These two markets rallied 89.7% and 48.3% respectively. South Korea has experienced an astounding 260% gain over the past 12 months. However, China declined by 6.8% and Hong Kong fell 6.4% in the June quarter, as investors remained cautious regarding the pace of Chinese economic growth and the outlook for domestic demand.

The rotation away from defensive sectors towards technology resulted in some relative weakness in global listed infrastructure stocks last quarter, with gains in the asset class restricted to 2.0%. There was more support for property, however, with global listed property returning 8.8%. Gains in Australian listed property were even stronger at 13.5%, with lower bond yields and the attraction of Goodman Group’s (up 22.5%) data centre strategies boosting support for the sector.

BANKS & RESOURCES FADE ON THE LOCAL MARKET

The Australian share market significantly underperformed the global average over the June quarter, with the S&P ASX 200 Index rise restricted to just 4.0%. Energy was the weakest performer, with the fall in global oil prices triggering a negative 16.5% return for the sector. It was another difficult period for healthcare stocks, with both CSL (down 18.5%) and Cochlear (down 28.0%) disappointing the market with earnings updates.

Although resource stocks attracted strong support early in the quarter, declines in the month of June saw gains in the sector restricted to just 2.5%. Similarly, there was a loss of support for banking stocks following the release of the Commonwealth Government Budget Statement for 2026/27, with the proposed removal of negative gearing on established residential property investments potentially reducing the scope for bank loan growth over time. However, technology stocks performed well on the local market, with some support returning for beleaguered software stocks. In addition, consumer stocks performed well, with Wesfarmers (up 24.0%) being a likely beneficiary of some rotation away from the banks towards other large industrial stocks.

AUSTRALIAN BOND YEILDS DECLINE DESPITE HIGHER CASH RATES

Following two interest rate increases in the March quarter, the RBA lifted cash rates again by 0.25% in May, to bring the cash interest rate to 4.35%. However, despite the lift in cash interest rates, longer term bond yields declined as weaker economic growth data softened market expectations around the likelihood of further cash interest rate increases. The Australian 10-year Government bond yield fell from 4.97% to 4.73%. In contrast, a more “hawkish” tone from the new Governor of the U.S Federal Reserve Bank contributed to a rise in U.S. 10-year Treasury Bond yields, which climbed from 4.30% to 4.44%.

The narrowing in the differential between longer term Australian and U.S. bond yields did result in some weakening in the $A late in the quarter. However, this weakening failed to completely offset earlier gains, with the $A finishing the quarter U.S. 0.2 cents higher at U.S. 68.7 cents. The $A was also stronger against the Japanese Yen and the Euro by 2.0% and 1.1% respectively.  

CONSIDERATIONS FOR INVESTORS

The extraordinary enthusiasm surrounding Artificial Intelligence (AI) continues to be the dominant influence on global financial markets. The prospect of AI fundamentally reshaping productivity has driven a substantial re-rating of equity valuations in specific parts of the equity market. While this optimism has been well supported by strong earnings growth from many of the companies along the AI supply chain, some areas of the market are beginning to display characteristics consistent with investor euphoria. The recent strength of the South Korean share market, which has been accompanied by a high incidence of local investors taking geared exposure to a concentrated market, is one example suggesting that investor expectations may now be running ahead of reality.

Unlike many previous speculative market episodes, however, the current rally has been accompanied by a meaningful improvement in corporate earnings  – rather than simply expanding valuation multiples. This distinction makes comparisons with historical market bubbles less straightforward. The key challenge for investors is determining whether the exceptionally strong earnings growth currently being generated by AI-related businesses can be sustained over the medium to longer term. Given the potentially transformational nature of AI, forecasting the eventual scale of its commercial benefits is inherently difficult.

Beyond valuation considerations, inflation remains another important source of uncertainty. Although lower oil prices have provided some temporary relief to headline inflation, price pressures in many developed economies remain above central bank targets. Should inflation prove more persistent than currently anticipated, central banks may be forced to tighten monetary policy further, or delay expected interest rate reductions. Such an outcome appears unlikely to be fully reflected in current equity market pricing and would present a headwind for the more highly valued segments of global share markets.

Despite these risks, attractive investment opportunities continue to exist across global equity markets. Valuation dispersion between sectors, regions and individual companies remains unusually wide, with many high-quality businesses still trading at relatively modest valuations despite possessing strong balance sheets, durable competitive advantages and attractive long-term growth prospects. This environment is well suited to active investment managers able to exploit these pricing anomalies and potentially generate meaningful outperformance over coming years.

The investment backdrop is arguably more challenging within Australia. Economic growth remains subdued, household spending continues to be constrained by elevated interest rates and cost-of-living pressures, and earnings momentum within the market’s two largest sectors—banks and resources—has begun to moderate. Given the significant concentration of the Australian share market in these sectors, investors may find it increasingly difficult to generate attractive returns through domestic equities alone.

Against this backdrop, maintaining a well-diversified portfolio with a healthy allocation to overseas equities appears warranted, particularly where managers have the flexibility to identify opportunities across a much broader investment universe. At the same time, longer-dated Australian Government bonds continue to offer relatively attractive prospective returns compared with many other fixed income sectors and may provide valuable portfolio diversification should economic growth weaken or equity market stress increase.

Important Information

The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR, MSCI World ex Australia NR Hdg AUD, FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged), MSCI China (Composite) in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HKD, MSCI United Kingdom TR in GBP, Nikkei 225 in JPY, S&P 500 TR in USD.