Economic Update - August 2026

July brought a more cautious tone to global financial markets, although not all asset classes moved in the same direction. Australian shares outperformed many overseas markets, while global shares softened as investors navigated higher bond yields, renewed geopolitical tensions and ongoing questions about inflation and interest rates. At the same time, resilient economic conditions continued to provide support to many areas of the market.

Economic Backdrop

A key theme during the month was the impact of renewed tensions in the Middle East and higher oil prices. These developments contributed to inflation concerns and pushed government bond yields higher. Rising bond yields can reduce the appeal of growth-oriented companies because future earnings are discounted more heavily when interest rates move higher.

Markets also remained focused on the significant investment taking place in artificial intelligence (AI) infrastructure. Research highlighted that strong earnings growth among major US technology companies has been supported by substantial AI-related spending, although investors are increasingly assessing how sustainable this unusually strong earnings growth may be over time.

Australian Shares

Australian shares delivered a strong month, with the S&P/ASX 200 Index rising 2.3%. Financial companies led the gains as investor confidence improved, helping support the banking sector. Energy stocks were also among the strongest performers as oil prices moved higher. Healthcare shares produced positive returns, while consumer-focused sectors posted modest gains.

Not all areas of the market participated in the rally. Information technology was the weakest sector, while materials and industrial companies also faced pressure from softer commodity demand and a more cautious growth outlook. Smaller Australian companies underperformed larger companies, reflecting their greater exposure to these weaker sectors.

International Shares

Global share markets were slightly weaker overall during July. The US market was broadly flat, although technology shares became more volatile following their strong gains in recent months. Higher bond yields and changing expectations for interest rates weighed on higher-valued growth companies.

Performance varied significantly across regions. The UK and Germany produced solid gains, while Hong Kong recorded particularly strong returns. In contrast, emerging markets generally underperformed developed markets, although outcomes differed considerably between countries.

Property, Infrastructure and Fixed Interest

Listed property delivered positive returns during the month, supported by resilient property fundamentals and ongoing demand for income-producing assets.

Infrastructure also generated modest gains, helped by its relatively defensive earnings profile.

Fixed interest markets faced a more challenging environment as bond yields rose. Both Australian and global bond markets recorded negative returns during July. Credit markets were mixed, with Australian corporate bonds remaining relatively resilient while global credit spreads widened modestly.

What Markets Are Watching

Investors continue to monitor several important themes, including inflation trends, the outlook for interest rates and the economic implications of geopolitical developments. Markets are also closely watching the scale of investment in AI and the extent to which ongoing spending translates into future earnings growth. Research suggests that AI-related investment remains a significant influence on global markets, particularly within the technology sector.

What This Means for You

July was a reminder that market performance can vary significantly across regions, sectors and asset classes. While Australian shares performed strongly, global markets faced headwinds from higher bond yields and renewed inflation concerns. Diversified investment markets continued to experience both opportunities and challenges as investors balanced resilient economic conditions against an evolving economic and geopolitical backdrop.

Thanks to our research partners at Lonsec for assisting with the preparation of this Economic Update.