My thoughts

Market Overview

May delivered a strong recovery across global equity markets as investors became increasingly optimistic that geopolitical tensions in the Middle East may stabilise and that economic growth remains resilient despite elevated interest rates.

Offshore equity markets materially outperformed Australia again during the month, led by continued strength in US technology and AI-related companies. The S&P 500 gained 5.2% for May, while the Nasdaq rose 8.4%, both reaching record highs.

Australian equities also posted gains, although performance continued to lag global peers. The S&P/ASX 200 rose 1.15% during May, supported by resources and small caps, while domestic economic concerns and higher interest rate sensitivity continued to weigh on broader sentiment.

Importantly, volatility eased throughout the month as oil prices declined materially from March highs following improving sentiment around potential Iran ceasefire negotiations. Brent crude fell sharply during May, easing some inflation concerns and supporting risk assets globally.

Global Developments
Two key forces continue to shape markets:

Geopolitical risk and energy markets
Markets continued to focus on three dominant themes:

1. Artificial Intelligence and earnings growth
The AI investment cycle remains the strongest thematic driver of global markets.
Large US technology companies continue to deliver strong earnings growth, while improving productivity expectations and significant capital expenditure in AI infrastructure are supporting investor confidence.
Importantly, leadership is gradually broadening beyond a narrow group of mega-cap companies into industrials, semiconductors and selected consumer sectors. This suggests markets are increasingly pricing a broader economic benefit from the AI cycle rather than a purely speculative theme.

2. Geopolitics and oil prices
Markets became more optimistic during May that the conflict involving Iran may stabilise.
Progress toward ceasefire discussions and improving diplomatic engagement helped drive oil prices lower and reduce immediate inflation concerns. However, geopolitical risks remain elevated, and energy security continues to be a key structural issue globally.
Governments worldwide are increasingly focused on:
• Fuel security
• Supply chain resilience
• Domestic energy capability
• Reduced reliance on unstable regions

3. Interest rates and inflation
Inflation remains the key macroeconomic issue.
While easing oil prices helped improve sentiment during May, inflation data globally remains sticky, particularly across services and labour-intensive sectors.
Central banks continue to signal they are prepared to maintain restrictive monetary policy if required. Markets are increasingly accepting that interest rates may remain elevated for longer than previously expected.

Australian Economy
The Australian economy continues to face a challenging backdrop.
The Reserve Bank of Australia remains focused on preventing inflation expectations from becoming entrenched. While markets had previously expected rate cuts during 2026, attention has shifted toward the possibility of further tightening or an extended period of restrictive policy settings.

Higher interest rates, elevated living costs and weak productivity continue to pressure household consumption and business investment.
Australia also remains highly exposed to:

• Rising energy costs
• Government spending-driven inflation
• Slowing consumer demand
• Weak productivity growth

At the same time, structural pressures on the Australian economy continue to build, particularly through higher regulation, labour market rigidity and increasing taxation reliance on individuals rather than broad productivity reform.

Australian Federal Budget
Key takeaways from the 2026-27 Federal Budget

Budget a “tax grab”
• The Budget increases the tax burden on ordinary Australians, while undermining incentives for investment, productivity and business confidence.

Big capital gains tax (CGT) changes
• From 1 July 2027, the CGT discount will be replaced by indexation for assets held more than 12 months, with a minimum 30 per cent tax on net capital gains across all CGT assets, including pre-1985 assets.

Changes to negative gearing
• Landlords will no longer be able to negatively gear their investment properties purchased from Budget night, except eligible new builds.

The end of Trusts?
• From 1 July 2028, trustees of discretionary trusts face a 30 per cent minimum tax on taxable income, with a three-year window to restructure into other entity types.

Modest tax cut
• A $250 tax offset will deliver modest tax relief from 1 July 2027 for employees and sole traders earning business income.

Deeper in the red
• The Budget deficit is forecast to hit $31.5 billion in 2026-27, with deficits over the next four years expected to total more than $150 billion.

Global gusts
• Treasury forecasts the Middle East conflict will slow Australia’s economic growth from 2.25 per cent in 2025-26 to 1.75 per cent in 2026-27.

Pressure at the bowser
• Treasury expect higher fuel prices to flow through to a broader range of goods and services in the coming months.

Outlook
Markets remain focused on:
• Inflation trends
• Central bank policy
• The durability of global earnings growth
• Geopolitical developments
• Energy prices and supply chains

While risks remain elevated, global markets continue to demonstrate resilience, particularly in sectors benefiting from structural growth themes such as AI, infrastructure and productivity-enhancing technologies.

At the same time, higher interest rates are continuing to provide attractive income opportunities across floating rate debt and credit markets.

Two key forces continue to shape markets:

Geopolitical risk and energy markets

Markets continued to focus on three dominant themes:

1. Artificial Intelligence and earnings growth

The AI investment cycle remains the strongest thematic driver of global markets.

Large US technology companies continue to deliver strong earnings growth, while improving productivity expectations and significant capital expenditure in AI infrastructure are supporting investor confidence.

Importantly, leadership is gradually broadening beyond a narrow group of mega-cap companies into industrials, semiconductors and selected consumer sectors. This suggests markets are increasingly pricing a broader economic benefit from the AI cycle rather than a purely speculative theme.

2. Geopolitics and oil prices

Markets became more optimistic during May that the conflict involving Iran may stabilise.

Progress toward ceasefire discussions and improving diplomatic engagement helped drive oil prices lower and reduce immediate inflation concerns. However, geopolitical risks remain elevated, and energy security continues to be a key structural issue globally.

Governments worldwide are increasingly focused on:

• Fuel security
• Supply chain resilience
• Domestic energy capability
• Reduced reliance on unstable regions

3. Interest rates and inflation

Inflation remains the key macroeconomic issue.

While easing oil prices helped improve sentiment during May, inflation data globally remains sticky, particularly across services and labour-intensive sectors.

Central banks continue to signal they are prepared to maintain restrictive monetary policy if required. Markets are increasingly accepting that interest rates may remain elevated for longer than previously expected.

Australian Economy

The Australian economy continues to face a challenging backdrop.

The Reserve Bank of Australia remains focused on preventing inflation expectations from becoming entrenched. While markets had previously expected rate cuts during 2026, attention has shifted toward the possibility of further tightening or an extended period of restrictive policy settings.

Higher interest rates, elevated living costs and weak productivity continue to pressure household consumption and business investment.

Australia also remains highly exposed to:

• Rising energy costs
• Government spending-driven inflation
• Slowing consumer demand
• Weak productivity growth

At the same time, structural pressures on the Australian economy continue to build, particularly through higher regulation, labour market rigidity and increasing taxation reliance on individuals rather than broad productivity reform.

Australian Federal Budget

Key takeaways from the 2026-27 Federal Budget

Budget a “tax grab”

• The Budget increases the tax burden on ordinary Australians, while undermining incentives for investment, productivity and business confidence.

Big capital gains tax (CGT) changes

• From 1 July 2027, the CGT discount will be replaced by indexation for assets held more than 12 months, with a minimum 30 per cent tax on net capital gains across all CGT assets, including pre-1985 assets.

Changes to negative gearing

• Landlords will no longer be able to negatively gear their investment properties purchased from Budget night, except eligible new builds.

The end of Trusts?

• From 1 July 2028, trustees of discretionary trusts face a 30 per cent minimum tax on taxable income, with a three-year window to restructure into other entity types.

Modest tax cut

• A $250 tax offset will deliver modest tax relief from 1 July 2027 for employees and sole traders earning business income.

Deeper in the red

• The Budget deficit is forecast to hit $31.5 billion in 2026-27, with deficits over the next four years expected to total more than $150 billion.

Global gusts

• Treasury forecasts the Middle East conflict will slow Australia’s economic growth from 2.25 per cent in 2025-26 to 1.75 per cent in 2026-27.

Pressure at the bowser

• Treasury expect higher fuel prices to flow through to a broader range of goods and services in the coming months.

Outlook

Markets remain focused on:

• Inflation trends
• Central bank policy
• The durability of global earnings growth
• Geopolitical developments
• Energy prices and supply chains

While risks remain elevated, global markets continue to demonstrate resilience, particularly in sectors benefiting from structural growth themes such as AI, infrastructure and productivity-enhancing technologies.

At the same time, higher interest rates are continuing to provide attractive income opportunities across floating rate debt and credit markets.

Final Thoughts

May reinforced the importance of diversification and global exposure.

Offshore markets continue to outperform Australia, supported by stronger earnings growth, better productivity trends and greater exposure to structural themes such as artificial intelligence and technology infrastructure.

The investment environment remains more complex than in previous years, with inflation, energy security and geopolitical developments continuing to influence markets and policy settings.

Encouragingly, volatility eased during May, and market resilience remained strong despite ongoing uncertainty.

If you have any questions please give me a call.