CIO market update for March 2026

In this CIO market update, Rob Hogg reviews February’s key market drivers. February markets were shaped by shifting investor views on AI’s disruptive impact, renewed uncertainty around US trade policy following the Supreme Court’s overturning of Trump’s emergency tariffs and escalating geopolitical tensions in the Middle East late in the month. Equity markets experienced significant sector rotation, with capital-heavy industries outperforming as traditional “capital light” growth sectors—particularly software and IT—came under pressure. At the same time, resilient inflation and employment data in both the US and Australia complicated the outlook for interest rates, keeping central banks cautious and market volatility elevated heading into March.

Jump to ⏬:  USA  |  AUS  |  OUTLOOK

Market performances in February were dominated by investors’ evolving views about the potential impact of Artificial Intelligence (AI) on industry sectors (especially software), the US Supreme Court’s overturning of Trump’s Emergency “Liberation Day” tariffs, and rising tensions in the Middle East which erupted on the last day of the month. The equity sector rotation thematic was very much in evidence in Australia as well. Key macro data releases pointed to ongoing resiliency in inflation and employment which will keep the RBA’s focus on further potential rate hikes in coming months.

On February 20 the US Supreme Court has ruled against the International Emergency Economic Powers Act (IEEPA) tariffs which has caused tariff uncertainty to rise again, with the EU in particular putting future negotiations on hold. But market reaction was relatively subdued. More important in determining market performances was the ongoing rotation in the US equity market as investors increasingly worried about the potential for AI to disintermediate a range of software companies. The eruption of the conflict in the Middle East on the last day of the month will now dominate the market’s trajectory in March.

Reflecting the sharp performance rotation in underlying industry sectors in the US equity market, key US share market indexes ended the month weaker – NASDAQ lower by 3.4% and the S&P 500 down 0.9%. The Japanese market performed strongly again, rising another 10% as investors increasingly price the prospect of more stimulatory policies under the new government.  The large cap Australian equity market ended 3.9% higher but smaller cap local equities fell by 2.6%.

US yields fell over the month with 10-year yields down by 0.30% to 3.94% and shorter-dated 2-year yields down by 0.15%. The Australian curve moved by slightly less than the US curve as Australian 10-year bond yields fell by 0.155% and Australian 3-year bond yields fell by 0.05%. The one-day impact of the RBA’s rate hike (yields rose around 0.06%) dissipated by end month.

The Australian Dollar (AUD) rallied from USD 0.6960 at end January to around USD 0.7120 by end February but these gains reversed as the Middle East conflict began.

Key market movements over January were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) rose by 3.9%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index fell by 2.6%.
• US equity market (S&P 500) fell by -0.9%.
• Measures of market volatility rose sharply toward the end of February with the MOVE and VIX indexes (measuring expected volatility in bond and equity markets respectively) rising.
• Australian 10-year bond yields fell by 0.155% to 4.655% and Australian 3-year bond yields fell by 0.05%, closing at 4.22%. These moves caused the yield curve to “bull-flatten”
• The US bond market rallied more sharply as the US 10 bond yield fell by around 0.30%, closing at 3.94%, while 2-year yields fell by 0.15% to end at 3.375%
• The Australian dollar rose compared with the USD, closing the month around USD 0.7120, up from USD 0.6960 at end January.

Key market movements over the month

In this monthly update, we look at:

• Trump (and tariffs) again
• AI’s potential impact is increasingly impacting share price performances globally and in Australia
• US data seems to be surprising on the upside…
• …causing an increasing number of Fed voting members to talk of delaying expected rate cuts
• Only two data releases matter in Australia – inflation and employment – and both are painting the RBA further into a corner.
• The outlook – how might the Middle East conflict impact markets, and how does it impact our pre-existing caution

Review of the month’s major developments

• USA •

President Trump’s tariffs upended by the US Supreme Court, causing renewed uncertainty

On February 20 the US Supreme Court ruled by a 6-3 margin against the International Emergency Economic Powers Act (IEEPA) tariffs imposed against Canada, Mexico, and China over concerns related to fentanyl and more broadly against trade partners to address the large US trade deficit.

In response, the Trump administration quickly announced that it would use section 122 of the 1974 Trade Act to replace the IEEPA tariffs with a 10% duty on imports. But then over the following weekend, Trump indicated this figure would be raised to 15%. It is unclear whether the Administration’s new approach will stand up to any potential legal challenges.

Instead of reducing confusion regarding the future trajectory of US trade policies, the delayed decision by the US Supreme Court to strike down the IEEPA tariffs and the Administration’s response will likely lead to an even greater unpredictability.

AI’s potential impact on business models is increasingly impacting share price performances

Equity sector performances across the globe in February were impacted by a very significant rotation in sector performances. This seems to have been driven by the market’s re-evaluation of the potential impact of AI on many of the traditional “new economy” business models that have performed so strongly over the past decade – in particular Software and IT Services – with their business models (their competitive moats) and associated margin durability now increasingly being questioned as the application of AI permeates the economy.

Another market impact of AI, as noted in research by Goldman Sachs (“Strategy Matters – The HALO effect.” February 24, 2026), is that it is turning some of the US market’s so-called “Capital Light” companies into “Capital Intensive” industrials whereby the five US hyperscalers (companies providing cloud and AI infrastructure including Amazon, Microsoft, Google, Meta and Apple)  have had to begin very significant capex programs to ensure their competitiveness in developing models and compute capacity.

The very significant increase in AI capex by the hyperscalers has prompted investors to question their ability to collectively generate adequate returns on investment, which has begun to negatively impact their share price performances.

As the GS analysts note, against this background, the market is increasingly favouring companies that have invested in hard to replicate physical assets — capital heavy industries rather than capital light. These capital heavy attributes are usually fund in sectors such as Utilities, Basic Resources, Energy and Telecoms, sectors that are often characterised by regulated infrastructure, high fixed capital requirements and long duration assets with low obsolescence.

Sectors now least in favour include Software & IT Services, Internet, Media and other digital content or platform businesses.

These trends are now being reflected in the Australian market too

The local share market began to exhibit some of these trends during February with the strongest monthly performances being exhibited by capital heavy sectors including Materials (BHP and RIO) and Energy (AGL, Woodside). The poorest performing sectors included those potentially most directly at risk from the disintermediating impact of AI – Consumer Discretionary stocks including Flight Centre and Temple and Webster and Info Tech companies including Xero, Wise Tech. Online providers including REA (Real Estate) and SEEK (employment) were also sharply weaker during the month,

Australian company February reporting season dominated by record high share price volatility

The February reporting season witnessed a new record high in share price volatility with the proportion of ASX 200 stocks that experienced share price swings of +/- three standard deviations on the day of their results.  Over a third of companies are seeing on-day moves in excess of 3 standard deviations according to JP Morgan analysts – yet another volatility record.

Share price performances on day of reporting – price moves of +/- 3%

Source: JPM

Unsurprisingly, AI was a very prominent feature of result presentations, particularly in the results of CBA, TLS, CAR and REA. On the results day, the market has appeared to reward clear strategies for adopting/managing AI (CAR), while selling uncertainty (REA).

US data seems to be surprising on the upside

Two key data releases in February  surprised to the upside (manufacturing and employment), and this seems to be becoming a broadening trend. Early in the month the key report on US manufacturing produced by the Institute of Supply Management (ISM) recorded a solid 4.7 percentage point increase to 52.6 while the important New Orders index jumped by almost 10 percentage points to 57.1. These are some of the largest ever monthly increase in these indexes suggesting they are statistically significant.

ISM New Orders Index

Source: ISM

Employment was reported to have risen by rose by 130,000 in January, and the unemployment rate was changed little at 4.3%. Admittedly much of the jobs growth in January was driven by non-economically sensitive (non-cyclical) sectors such as healthcare and social assistance (growth in these types of jobs is not necessarily suggestive of a strengthening cyclical upturn in the US), but the continued low unemployment rate appears to reflect a solid employment situation in the US.

Monthly change in Nonfarm payroll employment

Source: US Bureau of Labor Statistics

Signs of rebounding growth and resilient inflation causing Fed-speak to downplay rate cut prospects

As well as the signs of a potential rebound in US activity, inflation pressures remain resilient too. The key inflation measure followed by the US central bank – Personal Consumption Expenditure (PCE) inflation is still recording annual rates of change of around 3%, well above the Fed’s 2% inflation target.

US PCE Inflation (annual%)

Source: US Bureau of Economic Analysis

Against this background hinting of a rebound in the economy while inflation remains resilient, a number of FOMC voting members have been giving speeches suggesting they are incrementally moving less-dovish (less supportive of further rate cuts). A good example is Fed Governor Waller who, at the January 2026 FOMC meeting dissented against the FOMC decision to hold rates constant in favour of one additional 25bps cut. He spoke during the month, now saying that although inflation has decreased, his main concern remains the US labour market, suggesting that a continued recovery in the US labour market would cause him to support a pause in further rate cuts.

Putting further pressure on inflation will be the rise in oil prices resulting from the invasion of Iran. The magnitude and duration of the impact will be a function of how long the war lasts, which at this stage is highly uncertain.

• AUS •

Only two data releases matter in Australia – inflation and employment – and both are painting the RBA further into a corner..

The two key data releases for the RBA and their policy making decisions are inflation and employment. Booth surprised on the upside for January.

In the 12 months to January 2026 the Consumer Price Index (CPI) rose 3.8%, unchanged from 3.8% in the 12 months to December 2025. However, the key underlying measure – the trimmed mean – accelerated very slightly to 3.4%, up from 3.3% in the 12 months to December 2025. This is the key signpost for the RBA, and it leaves them very much at risk of having to raise rates again, and with the further expected pressure on CPI from rising petrol pump prices, this pressure is unlikely to lessen in the short term.

All groups and Trimmed mean CPI measures (annual %)

Source: ABS (Note quarterly annual change up until April 2025)

Also surprisingly with its resiliency was the gain in employment recorded in January – the number of employed people rose by 17,800 in January, leaving the unemployment rate unchanged at 4.1%, a level suggestive of continued tightness in the employment market.

Unemployment rate (%)

Source: ABS

• OUTLOOK •

Middle East conflict

The initial market impact of the outbreak of war in the Middle East has been generally as would be expected

• US dollar higher (AUD lower)
• Oil and gold prices higher
• Equity markets lower – ASX 200 down 0.5% but with Materials, Energy and Consumer Staples stocks doing relatively best
• Market interest rates (very slightly) lower, but by just 2/3 basis points

We clearly have no unique insight into how the situation will develop but there seems to be a range of potential market outcomes, based on the following factors:

• the duration and the magnitude of the conflict.
• the resulting impact on oil supplies and the oil price which is most important from a purely market perspective. Historically, geopolitical events have had only a short-lived influence on markets and economies, but the oil price impact will be key.
• Whether and for how long the key Straits of Hormuz remain closed will be key in determining the oil price impact.
• A sustained higher oil price would have clear inflation and recession risks – “stagflation”. As the world’s largest net importer of oil, China is clearly at economic risk from sustained higher oil prices. The US in contrast is now near oil self-sufficient.
• To judge the market’s evolving assessment of stagflation risks, the best guides to evolving market sentiment will be the copper price (as a proxy for global growth) and “break even” inflation rates (as a measure of inflation expectations (nominal yield minus inflation protected yield).

For interest rates, a sustained oil price spike could cause inflation expectations to increase (a first-round effect), so putting upward pressure on market interest rates. But this is only the initial impact as over time a higher oil price (higher only because of supply-related factors such as a war), acts as a tax. As such, over time a higher oil price has a depressing impact on spending and a depressing impact on economic growth.

For equities, given the potential stagflationary impact of a spike in oil prices, the overall impact on the broader market is negative. But as displayed by the initial market reaction, some sectors perform relatively (even absolutely) well including Energy and Materials, as well as Consumer Staples (seen as non-cyclical and less impacted by any economic disruption)

Broader outlook

We remain cautious about the market outlook, mainly due to the elevated level of global market valuations and the associated extent of market optimism. The Middle East situation only makes the outlook more subject to downside risk. We noted last month that, given the majority of investors began the year seeing only upside – for growth, for equity earnings and for the extent of US central bank rate cuts – the risk of disappointment is high.

We have been relatively more sanguine about prospects in Australia given that the domestic economy has been showing signs of recovery following the RBA rate cuts in calendar 2025. However, the RBA now finds itself with a dilemma – that the very modest growth revival seems to be perpetuating price pressures in the economy, especially home-growth “core-services” prices. How the RBA balance these continued pressures with (or without) a further policy response will play a key role in driving equity market performance in 2026.

We remain cautious, but not significantly underweight – we are looking for opportunities to invest in high quality companies that have not kept up with the market. As part of this process, we are carefully assessing the very significant rotation in the domestic market which we expect will lead to a number of companies being “unfairly” punished by the threat of AI.

It is there that we are focusing our attention.

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