Economic Update - October 2026

September was a challenging month for financial markets, with rising interest rates and higher government bond yields weighing on investor sentiment. Inflation concerns remained a key focus for investors, while renewed tensions in the Middle East contributed to higher oil prices. Although most major asset classes delivered weaker returns, movements in currency markets helped cushion the impact of international investments for Australian investors.

Economic Backdrop

Central banks continued their efforts to manage inflation during September, with both the US Federal Reserve and the Reserve Bank of Australia increasing interest rates.

Higher borrowing costs and expectations that interest rates may remain elevated for longer led investors to reassess economic growth expectations and market valuations.

At the same time, the Australian dollar weakened against major currencies. This helped boost returns from unhedged international investments for Australian investors, offsetting some of the weakness experienced in overseas share markets.

Sector Performance at a Glance

Australian Shares

Australian shares declined during September, with the S&P/ASX 200 Index falling 2.4%.

Information technology was the weakest-performing sector as higher bond yields reduced investor appetite for growth-oriented companies. Materials stocks were also weaker as iron ore prices softened during the month.

Healthcare was a notable exception, delivering positive returns following better-than-expected company results. The energy sector also proved relatively resilient as oil prices moved higher.

Smaller companies declined alongside the broader market, with weaker performance from resource-related companies contributing to the falls.

International Shares

International share markets also weakened in underlying terms during September. However, the weaker Australian dollar largely offset these declines for local investors holding unhedged international assets.

The United States was comparatively resilient, supported by ongoing strength in artificial intelligence-related technology companies. Technology and communication services were among the few sectors globally to deliver positive returns.

Most other sectors experienced declines, including materials, consumer discretionary, real estate and financials. Europe, the United Kingdom, China and India were among the regions that recorded weaker performance during the month.

Property, Infrastructure and Fixed Interest

Listed property and infrastructure assets faced a difficult environment as rising bond yields reduced the appeal of income-focused investments.

Global listed property declined 5.3%, while global infrastructure investments fell 4.8%.

Fixed interest markets also delivered negative returns. Australian bonds fell 0.9% and global bonds declined 1.7% as investors adjusted expectations for inflation and future interest rates. Australian investment-grade credit was a positive exception, producing a modest gain during the month.

What Markets are Watching

Markets remain focused on inflation, interest rate policy and economic growth.

Recent company reporting in Australia highlighted that many businesses continue to manage costs effectively, although consumers are becoming increasingly selective with their spending. Corporate balance sheets generally remain healthy, but investors will be closely monitoring how businesses perform in a higher interest rate environment.

Markets are also paying close attention to productivity trends, housing market conditions and future central bank decisions, as these factors are expected to influence economic conditions in the months ahead.

What This Means for You

September was a reminder that financial markets can be influenced by a range of economic and geopolitical factors. While many asset classes experienced short-term weakness, diversification across different sectors, regions and asset classes continued to play an important role in managing market volatility.

Maintaining a focus on long-term financial goals remains important during periods of market uncertainty and changing economic conditions.

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