A Challenging Macro Mix: FY 2026/27

Financial Newswire Contributor

7 July 2026

As we begin a new financial year, investors are entering an environment that looks quite different to the one that prevailed 12 months ago, says Gareth Aird, Chief Investment Strategist at Evidentia Group.

The global economy has been through an energy price shock that has not been fully resolved.  And yet the world’s largest economy continues to demonstrate impressive resilience and corporate earnings remain firm.

At the same time, inflation remains above target in the US and has accelerated over the past six months.  This means that at the very least monetary policy is likely to stay restrictive for longer and may even need to be tightened.  Higher-for-longer US rates leave less room for disappointment in valuations.

The peace agreement between the US and Iran has reduced the risk of a major disruption to global energy supplies, allowing oil prices to retrace much of their earlier rise.  That has lowered the immediate risk that higher energy prices reignite inflation and force central banks into a more aggressive tightening cycle.

However, shipping activity through the Strait of Hormuz remains below normal levels, strategic petroleum reserves in the US continue to be depleted and refining margins remain elevated.

These factors suggest the physical oil market remains tighter than the oil price alone would indicate.  Energy is therefore less likely to be the inflation problem it briefly threatened to become.  But we do not expect it to provide as much disinflationary support as markets currently anticipate.

Another key development for FY2026/27 is the change in leadership at the US Federal Reserve.

Kevin Warsh’s first meeting as Chair signalled a meaningful shift in the Fed’s communication.  The emphasis has moved decisively back towards price stability and the market has interpreted that as lowering the hurdle for further policy tightening should inflation remain persistent.

Importantly, the economic backdrop gives the Fed room to maintain that stance. Employment growth is healthy, household spending continues to expand, business investment remains robust and productivity growth is strong.  Above-target inflation is less problematic when growth is firm, but inflation risks remain present.

For equity investors, this creates an interesting balance.  We remain constructive on US equities because earnings momentum is strong and recent gains have broadened beyond the largest technology companies.  We favour companies with exposure to the significant amount of AI capex in the pipeline over the period ahead.

The improving breadth of the market is also an encouraging sign that confidence is increasingly being supported by the strength of the underlying economy rather than a single investment theme.

At the same time, valuations have become increasingly demanding.  The equity risk premium has fallen to historically low levels, meaning investors are receiving relatively little additional compensation for owning shares rather than government bonds.

We continue to believe the fundamental backdrop supports US equities, but the margin for disappointment has narrowed.  Earnings growth will need to continue doing much of the heavy lifting over the year ahead.

Closer to home, Australia enters the new financial year facing a more challenging cyclical backdrop.  Inflation remains above target, productivity growth is weak and the RBA continues to face the difficult task of returning inflation to target without unemployment rising too much.

Markets increasingly believe the RBA has finished tightening following its June pause.  We are less convinced.

Growth is slowing, but household spending remains more resilient than sentiment surveys suggest, the labour market is loosening only gradually and inflation remains uncomfortably high. The RBA will need to slow the economy sufficiently to return inflation to target, meaning a period of below-trend growth in 2026/27.

That outlook supports our relatively cautious view on Australian equities.  Higher interest rates, slowing domestic demand and a softer housing market are likely to create a more difficult environment for domestically focused companies over the year ahead.

Australian government bonds have performed well, although much of the valuation opportunity that existed when 10-year yields approached 5% has disappeared. We still see a role for Australian duration as portfolio protection, but prospective returns are likely to be more modest without a sharper slowdown in growth.

As we look ahead to FY2026/27, our central message is one of cautious optimism. The global economy continues to display resilience and corporate earnings are supportive.

However, the easy gains from falling inflation and expectations of lower interest rates now appear largely behind us.  Investors are likely to be rewarded by maintaining diversified portfolios, remaining disciplined on valuation and identifying companies capable of delivering sustainable earnings growth in a more demanding macroeconomic environment.