Welcome to the Spring edition of On the Marc. In this edition, we will review markets for the first quarter of the 2026 financial year and consider the outlook for the foreseeable future.
Market update
Global equity markets moved higher during the quarter, supported by dovish Fed commentary, strong United States (US) earnings and a continued surge in artificial intelligence (AI) investment. The US economy has been surprisingly resilient despite an uncertain government and monetary policy backdrop. The Fed responded to weaker employment data with a dovish pivot during the quarter, resulting in a 25-basis-point (bps) rate cut at its September meeting. Federal Open Market Committee (FOMC) members’ median expectations are now for an additional 50 bps of rate cuts for the remainder of 2025 (up from 25 bps expected at the end of the last quarter).
The ASX200AI lagged other markets but still rose 4.7% for the quarter, despite a relatively weak corporate earnings season, a lower earnings growth outlook and a moderation in rate cut expectations. The RBA delivered a more hawkish outlook than expected in September following a slower-than-anticipated fall in underlying inflation alongside stronger consumption growth.
Gold performed strongly during the quarter (+17%), driven by a range of factors including ongoing global central bank buying, expanding US fiscal deficits, interest rate cuts and growing concerns regarding the Fed’s independence. The gold price has increased by 46% over the last 12 months, primarily due to supply disruptions and a strong global demand outlook, driven by power infrastructure and grid spending.
US monetary policy was a key focus for equity markets this quarter and a key reason for the rally. While recent US economic growth has been stronger than expected, with real GDP growth of 3.8% in Q2 2025, this has been accompanied by a sudden decline in employment growth. US non-farm payrolls data softened significantly over the last few months, with average new jobs created of 27,000 per month, well below the first few months of the year, where over 120,000 jobs per month were created (refer to Figure 1).
Source: Bloomberg
There has also been an ongoing deterioration in other labour market indicators such as the vacancy rate (ratio of job openings to unemployed workers), which is now below pre-pandemic levels (refer to Figure 2), and a gradual increase in the unemployment rate from 4.1% in June 2025 to 4.3% in August 2025.
Source: Bloomberg
Ultimately, this labour market weakness was sufficient for the Chairman of the Federal Reserve, Jerome Powell, to signal a dovish pivot in his annual address at the Jackson Hole Symposium in August and for the Fed to deliver a 25bps cut to the federal funds target rate at its meeting in September.
In contrast to the U.S. market, the ASX reporting season in August was generally weak, with an elevated proportion of companies missing FY25 consensus earnings expectations, and net downgrades to the average earnings outlook for FY26. The twelve-month forward earnings outlook for the ASX200 has now declined over each of the past three financial years. However, the ASX200 index has increased by 30% over this period. As a result, the ASX200 now trades on approximately 20x 12-month forward earnings. It has only (briefly) traded close to this level twice before – during the tech bubble and during the COVID-19 pandemic.
The outlook for the year ahead
The current outlook reveals several competing forces at play. A central theme is the ongoing transition in monetary policy. While global central banks are expected to continue easing as inflation cools, the pace of easing is likely to diverge, with some regions acting more cautiously than others. This will influence bond markets, with long-term yields facing upward pressure from persistently high government debt, even as short-term rates normalise.
In equity markets, performance is expected to be more broadly distributed than in recent years. However, US large-cap technology stocks, particularly those linked to Artificial Intelligence (AI), remain a dominant growth driver. AI investment continues to fuel corporate capital expenditure, providing a strong anchor for select sectors; however, the results must exceed the lofty expectations for this to continue.
Geopolitical fragmentation and trade policy uncertainty pose the most significant systemic risks, potentially disrupting supply chains and economic growth, which could dampen investor sentiment.
However, opportunities exist in diversification across geographies and asset classes. Non-U.S. international shares and emerging markets, which generally have lower valuations, offer potential upside. The current environment favours a selective and risk-managed approach over the favouring of passive investment strategies.
Did you know?
The mega cap US technology companies are expected to spend US$460b on AI related capital expenditure in 2025 alone (refer Figure 3). This is a 55% step up on the spending in 2024 and more than double the spend in 2022/23. The key debate remains what potential returns this spend will drive, particularly as these annual costs are likely to be depreciated over a short timeframe given the rapidly advancing technology.
Source: S&P Capital IQ, RBC Capital Markets
The forecast expenditure on AI for 2027 is US$567 billion. This is the same as the current gross domestic product (GDP) of Singapore!
Final reMarc
Markets have staged a remarkable recovery from the “peak fear” lows of April, when the full economic impact of Trump’s tariffs remained unclear. While corporate commentary continues to reflect heightened operational uncertainty in a post-tariff world, and US economic data suggest softer conditions, investors appear to have largely moved on. Market indices, valuations, and volatility indicators have all returned to prior highs. We continue to be optimistic about the period ahead however are very wary of the lofty valuations in certain sections of the Australian and global markets that have catapulted returned in recent times.
" Experience is making mistakes and learning from them. "
Bill Ackman
Key Facts & Figures
1. The Australian Cash Rate was on hold at the July meeting at 3.60%.
2. The RBA Cash Rate is likely to decrease in November when the RBA next meets (74% chance of a 0.25% rate cut).
3. Our annualised inflation rate is 2.1%. This is within the RBA’s target band of 2 - 3%.
4. Australia’s unemployment rate is 4.5%.
5. The US Federal Reserve cash rate band is 4.00% - 4.25%.