A year in review – and what a year it was!

Mike Taylor

Managing Editor and Publisher

2 July 2026

The 2025–26 financial year was defined by resilient global growth, persistent inflation risks, the broadening of the AI investment cycle and renewed geopolitical volatility, Zenith Investment Director and Head of Asset Allocation, Damien Hennessy says.

Equity markets generally advanced, but returns were uneven across regions and sectors. The US and several Asian emerging markets benefited from AI-related capital expenditure and semi-conductor demand, while Australia lagged as higher inflation, renewed RBA tightening and limited technology exposure weighed on relative performance.

Global equities: AI leadership broadened beyond the mega-cap platforms

AI remained the dominant market theme, but leadership evolved during the year. Early gains were concentrated in US hyperscalers and platform companies before shifting toward semi-conductor manufacturers, memory producers, power infrastructure and data-centre supply chains. This supported outperformance in markets with direct exposure to the AI hardware cycle, particularly Taiwan and Korea. Broader emerging market performance also improved as global trade recovered and investors rewarded economies linked to electronics exports and capital equipment demand.

US equities continued to benefit from strong earnings growth and extraordinary AI-related capital expenditure. However, valuations became more demanding and market breadth was a recurring concern. By mid-2026, investors were increasingly focused on whether AI investment would translate into durable productivity gains and cash flows, or whether parts of the market were beginning to discount an overly optimistic adoption path.

Japan and Asia: currency weakness, trade and reform supported returns

Japan also performed strongly. Easy monetary conditions, a comparatively weak yen and low real interest rates provided a supportive earnings backdrop, particularly for exporters. Corporate governance reform, higher shareholder returns and an improving global trade cycle reinforced the market’s appeal to international investors. Across Asia, technology exporters and markets connected to the semi-conductor supply chain benefited most from the global AI capex cycle.

Australia: inflation persistence and limited AI exposure drove under-performance

Australia notably lagged global peers. The local market had less exposure to the technology and AI themes that drove global indices, while earnings growth remained more subdued. Banks and consumer-facing sectors were pressured by higher funding costs, stretched household balance sheets and concerns relating to the housing sector. Resources provided some offset as commodity prices rallied, but this was not enough to close the performance gap with the US and technology-heavy Asian markets.

The macro backdrop also became more challenging. Australian growth improved into late 2025, but limited spare capacity and weak productivity meant that stronger demand quickly translated into renewed inflation pressure. The RBA reversed the easing delivered in 2025 and raised the cash rate at three successive meetings, reaching 4.35% in May 2026, while noting that inflation was likely to remain above the 2–3% target range for some time. Market attention then shifted to whether further tightening would be required as confidence softened, employment growth moderated and house prices came under pressure. The 2026 Federal Budget added to these housing-sector headwinds. Its redistributive policy focus, including the removal of negative gearing and changes to the Capital Gains Tax regime, further weakened investor sentiment. Depending on marginal tax rates, borrowing capacity is likely to fall by around 5–15%, which could reduce investor demand and weigh on bank lending for residential investment property.

Fixed income: range-bound yields, then renewed inflation risk

Bond yields were largely range-bound for much of the year, reflecting a tension between slowing labour markets and sticky inflation. In the US, the Federal Reserve cut the federal funds rate to a 3.50%–3.75% range in December 2025 as job gains slowed and downside risks to employment increased, partly reflecting uncertainty over tariffs. That initially supported bond markets and helped anchor the US 10-year Treasury yield around the 4% area.

By early 2026, however, the narrative had become more complicated. Strong AI-related investment supported activity, while higher oil prices kept inflation risks alive. Markets moved from expecting a smooth easing cycle to pricing a higher probability that central banks would need to pause or even tighten again. Longer-dated yields remained elevated as investors demanded compensation for inflation risk, fiscal deficits and policy uncertainty.

Commodities: energy shock, metals demand and gold volatility

Commodities had a very strong year overall, although performance diverged sharply by market. Solid global growth, AI-related electricity and infrastructure demand, the energy transition and geopolitical risk all supported prices. Copper, uranium and selected industrial metals benefited from electrification, grid investment and data-centre buildout. Energy markets were dominated by the Middle East conflict, which temporarily disrupted supply expectations and pushed oil into the US$90-115 a barrel range before prices retreated as markets began to anticipate a negotiated resolution.

Gold also experienced considerable volatility. It rallied through late 2025 and hit a peak of US$5450 an ounce in January this year as US rates fell, investors questioned the durability of US policy settings and central bank purchases remained strong. In the first half of 2026, as growth proved resilient and US interest rates and the US dollar lifted, gold gave back part of those gains.

Currencies: US dollar resilience and Australian dollar strength

The US dollar proved more resilient than many investors expected. Although Fed easing initially weighed on the currency, renewed US growth momentum, higher real yields and safe-haven demand supported the dollar in recent months. The Australian dollar, which had benefitted from RBA rate hikes and strong commodity prices up until May, softened as commodity prices retreated from conflict-driven highs and as the gap between Australian and US rate expectations narrowed. Domestic housing concerns and weaker confidence also weighed on sentiment toward the currency.

Key takeaways for investors

• AI was the defining structural theme, but leadership broadened from US platforms to semi-conductors, infrastructure and Asian supply-chain markets.
• Australia underperformed because of weaker earnings growth, limited technology exposure and a renewed inflation problem that forced the RBA back into tightening mode.
• Bond markets delivered periods of support as central banks eased, but sticky inflation, oil-price shocks and fiscal concerns kept long-end yields elevated.
• Commodities were supported by growth, electrification, AI-related power demand and geopolitical disruption, though energy prices became highly sensitive to conflict headlines.
• Currency markets rewarded US resilience, while the Australian dollar’s earlier support from RBA rate hikes and firm commodity prices faded in June.