Market overview
July was a month of sharp contrasts. Australian shares recorded a fourth consecutive monthly gain, supported by materials and renewed demand for the commodities required to build data centres and energy infrastructure. In the United States, however, the long-running technology trade became far more volatile. The S&P 500 slipped 0.1% and the Nasdaq Composite fell 3.2%, its weakest July in two decades, while the Dow Jones edged 0.3% higher.
The important development was not the end of the Artificial Intelligence investment cycle, but a change in market leadership. Semiconductor shares experienced a significant correction after an exceptionally strong first half, while software, selected large technology companies, industrials and the equal-weighted market held up better. This rotation is a reminder that even powerful long-term themes do not move in a straight line.
The S&P/ASX 200 finished July at 8,976.8 and gained almost 2% over the month. Materials led the market as copper and other industrial commodities benefited from expectations of sustained investment in power grids, data centres and advanced manufacturing. Healthcare and consumer staples were weaker, while the Australian dollar finished near US69.5 cents.
Bond markets remained unsettled. Higher oil prices and concern that inflation could remain above central-bank targets pushed long-term yields higher late in the month. The US 10-year Treasury yield reached around 4.7%, reinforcing the view that investors may need to live with higher borrowing costs for longer.
Global Developments
Artificial Intelligence: volatility within a structural trend
Artificial Intelligence remains the dominant global investment theme, but July demonstrated the importance of valuation discipline and diversification. The US semiconductor sector fell sharply as investors reassessed earnings expectations following extraordinary gains. At the same time, strong results from Microsoft and Amazon showed that cloud computing and AI investment are beginning to translate into revenue and profit growth for some businesses.
The market is increasingly distinguishing between companies that merely promise AI benefits and those that can convert investment into cash flow, productivity and durable competitive advantage. We continue to expect market leadership to broaden into software, industrial automation, energy networks, infrastructure, healthcare and companies using AI to improve efficiency.
Energy security and the Middle East
Renewed conflict in the Middle East and disruption to Gulf energy flows drove oil prices higher during July. Brent crude finished the month near US$88 a barrel after trading above US$100 earlier in the period. Higher energy costs lifted inflation expectations, placed pressure on transport and manufacturing costs, and complicated the outlook for central banks.
The International Monetary Fund now expects oil prices to rise by approximately 32% in 2026 compared with 2025. It forecasts global growth of 3.0% in 2026, recovering to 3.4% in 2027. The global economy remains resilient, but the benefits are uneven: energy exporters and countries connected to the AI technology supply chain are better placed than energy-importing economies with weak productivity growth.
Central banks remain cautious
The US Federal Reserve left the federal funds target range unchanged at 3.50%–3.75%. Three members voted for a 0.25 percentage point increase, highlighting growing concern that the energy shock could keep inflation elevated. The European Central Bank also held rates, with its deposit facility rate remaining at 2.25%, and said it would continue to assess the inflation consequences of the energy shock meeting by meeting.
For investors, the message is clear: the next phase of monetary policy is unlikely to be a simple or rapid easing cycle. Inflation, energy prices and fiscal policy will continue to influence interest rates and market valuations.
Australian Economy
Australia entered the new financial year with a mixed economic picture. Inflation eased, employment remained strong and business investment continued to provide support. However, underlying inflation is still above target, household budgets remain under pressure and weak productivity continues to constrain improvements in living standards.
Inflation and interest rates
Annual consumer price inflation eased from 4.0% in May to 3.8% in June. The monthly CPI fell 0.1%, helped by lower transport prices, but housing costs increased 6.8% over the year. Trimmed mean inflation—the Reserve Bank’s preferred measure of underlying inflation—remained at 3.6%.
The Reserve Bank left the cash rate unchanged at 4.35% in June after three increases earlier in 2026. It acknowledged that tighter financial conditions are slowing demand but made clear that it is prepared to raise rates again if inflation becomes embedded. The July inflation figures offer some relief, but they are not yet sufficient to declare the inflation problem solved.
Growth, employment and productivity
Australia’s economy grew by 0.3% in the March quarter and 2.5% over the year. GDP per person fell 0.1% during the quarter, showing that population growth continues to mask weaker outcomes at the individual level. Productivity, measured as GDP per hour worked, fell 0.6% in the quarter and rose only 0.3% over the year.
The labour market remains resilient. Employment increased by 76,300 in June and the unemployment rate held at 4.4%. This is positive for household incomes, although it also gives the Reserve Bank less urgency to lower interest rates while inflation remains above target.
The longer-term challenge is unchanged. Australia requires stronger private-sector investment, reliable and competitively priced energy, simpler regulation and policy settings that reward innovation and capital formation. Without sustained productivity growth, higher public and private costs will continue to place pressure on wages, profits and living standards.
Outlook
The investment outlook remains constructive, but more selective. Global growth has slowed without collapsing, company earnings remain broadly resilient and AI-related capital expenditure continues to support activity. Against this, valuations in parts of the US market remain elevated, energy risks have increased and interest rates may stay higher for longer.
Our portfolio focus remains on:
- maintaining global diversification rather than relying heavily on the Australian market;
- using high-quality floating-rate credit and enhanced-yield strategies to generate income and reduce portfolio volatility;
- avoiding overreaction to short-term market corrections where the long-term investment thesis remains intact; and
- preserving sufficient defensive assets and liquidity for each client’s income needs and risk tolerance.
August and September have historically produced more market volatility than July, and the approaching Australian reporting season will test whether local company profits can justify current valuations. We expect greater differences between sectors and individual companies, making security selection increasingly important.
Fun Fact: The Rising Cost of Federal Treasury
The Australian Department of the Treasury has grown substantially over the
past five reported financial years. Treasury’s year-end workforce increased
by 363 employees, or 28.1%, while annual employee benefits rose by 68.9%.
Total departmental operating costs increased by 49.7%.
| Financial year | Employees at 30 June | Employment cost | Treasury operating cost |
|---|---|---|---|
| 2020–21 | 1,291 | $172.8m | $277.6m |
| 2021–22 | 1,503 | $208.9m | $363.7m |
| 2022–23 | 1,488 | $240.7m | $377.1m |
| 2023–24 | 1,666 | $258.5m | $373.0m |
| 2024–25 | 1,654 | $291.9m | $415.5m |
| Change over five years | +363 | +$119.1m | +$137.9m |
| Percentage increase | +28.1% | +68.9% | +49.7% |
Source: Australian Treasury annual reports. Operating costs exclude
administered payments made on behalf of government.
The figures do not, by themselves, establish whether spending is efficient; Treasury’s responsibilities and work program can change over time. They do show, however, that employment costs have grown materially faster than both staff numbers and the department’s overall operating cost. This is a useful reminder that public-sector productivity and expenditure discipline matter to Australia’s long-term fiscal position.
Final Thoughts
July reinforced an enduring investment lesson: strong long-term themes are often accompanied by uncomfortable short-term volatility. The correction in semiconductor shares does not invalidate the AI investment cycle, just as a strong month for Australian resources does not remove the structural challenges facing the domestic economy.
The global economy continues to direct capital towards productivity, technology, energy security and innovation. Countries and companies able to deliver these outcomes are likely to attract investment and generate stronger earnings over time. Australia possesses outstanding natural resources, institutions and businesses, but it must improve productivity and maintain internationally competitive policy settings if it is to convert those advantages into higher living standards.
For investors, discipline remains more important than prediction. Diversification across regions, asset classes and return drivers can help portfolios participate in long-term growth while managing the impact of inflation, geopolitical shocks and changing market leadership.
We continue to favour globally diversified portfolios, measured exposure to structural growth themes, and high-quality income assets. Remaining patient, avoiding emotional responses to market volatility and keeping portfolios aligned with long-term objectives remain the most reliable foundations for preserving and growing wealth.
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Summary of Major Share Indices
| Index | 1 Month | 52 Weeks | YTD |
|---|---|---|---|
| DJIA | +1.04% | +20.41% | +9.20% |
| Nasdaq | -1.78% | +22.88% | +9.17% |
| S&P 500 | +0.09% | +20.07% | +9.41% |
| Russell 2000 | -2.16% | +35.29% | +18.11% |
| Europe 600 Index | -0.55% | +21.17% | +9.63% |
| UK FTSE 100 Index | +1.77% | +19.84% | +9.43% |
| Hong Kong Hang Seng | +10.85% | +5.62% | +0.99% |
| Japan Nikkei 225 | -7.72% | +57.75% | +27.86% |
| China Shanghai Composite | -5.23% | +7.65% | -3.44% |
| India S&P BSE Sensex | +0.43% | -8.36% | -3.11% |
| ASX 200 (Australia) | +1.50% | +3.63% | +3.01% |
Australian Dollar
| Close | 52-week Range | |
|---|---|---|
| AUD | 0.6992 | 0.6372–0.7278 |
Government Bonds
| Close | 52-week Range | |
|---|---|---|
| US 3 Month Bill | 3.775% | 3.58–4.418% |
| US 10 Years Note | 4.74% | 3.923–4.74% |
| US 30 Years Bond | 5.28% | 4.521–5.28% |
| Australia 10 years | 4.938% | 4.100–5.180% |
Source: Wall Street Journal.
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