CIO market update for June 2026

In this CIO market update, Rob Hogg reviews May’s key market drivers.

Against a background of continued heightened uncertainty regarding the conflict in the Middle East and its potential implications for oil prices, inflation and growth; equity markets across the globe continued to rebound in May. The Japanese equity market was a standout, rising by around 12% over the month, reportedly boosted by the continued inflow of foreign investors to the market. In the US, the tech-laden NASDAQ performed most strongly of the key US indexes, rising around 8.5%.

Within US equity markets, sector performances were heavily skewed towards Information Technology (+16%), driven by strong tech earnings and AI-related enthusiasm, with Tech the only sector to outperform the S&P 500 over the month. Meanwhile, the US Energy sector declined by 6% as oil prices fell over the month. Apart from the influence of Tech, an ongoing theme of generally better than expected economic growth and company earnings was key in supporting the continued recovery of US (and Japanese) equity markets in particular.

The Australian equity market also rose, but by less than most markets, with upside potential limited by the expected negative impact of RBA policy tightening on growth and earnings. Earnings warnings continued in the domestic market. Generally May witnessed a slight downgrade to investor outlooks for inflation and growth in Australia.

Most global market interest rates rose in the first half of May before retreating in the second half such that, on a month-end comparison, yields ended the month lower in nearly all developed markets, with the key exceptions of the US and Japan where upside growth surprises in key data releases and signs of rising inflation caused investors in both countries to upwardly revise their official policy rate expectations. Australian market interest rates also rose in the first half of the month but then rallied (yields fell) in the second half as investors reduced their expectations for future policy tightening moves by the Reserve Bank from the current cash rate of 4.35% – from more than one, to less than one implied additional rate hike by year end.

Measures of market volatility (the VIX index for equities and the MOVE index for bonds) continued to ease over the month after having spiked sharply higher in March to levels not experienced since Trump’s Liberation Day tariff announcements in April last year.

Oil prices fell sharply over the month (-17% WTI futures) while copper prices rebounded by 6.8%.

Macro-economic data took on a very slightly greater role in determining market performances in May, even in the midst of ongoing volatility in oil prices as expectations regarding the outlook for the Middle East conflict remained volatile.

The Australian Dollar (AUD) was very little changed, depreciating only very slightly over the month, slipping to USD 0.7185 at end May from USD 0.7200 at end April.

Key market movements over May were as follows:

• S&P/ASX300 Accumulation Index (i.e., including dividends) rose by 1.25%.
• S&P/ASX Small Ordinaries (Australian Small Companies) Accumulation Index rose by 2.0%.
• US equity market (S&P 500) rose by 5.2%.
• Measures of market volatility eased further during the month as measured by the MOVE and VIX indexes which measure expected volatility in bond and equity markets
• The US bond market ended the month with yields higher as the US 10 year bond yield rose by around 0.06%, closing at 4.435%, while 2-year yields rose by 0.135% to end the month at around 4.00%. Yields had peaked at significantly higher levels during the month (10 year yield hitting 4.67% and 30 year hitting 5.15%, the highest in 20 years) with the simple month-end comparison only telling part of the story of the month. Yields had peaked following a string of stronger-than-expected US and Japanese data around mid-month, with the extent of expected US rate hikes also peaking around this time
• The Australian bond market behaved differently – although yields drifted higher until mid-month in line with the US pattern, by end month 10-year bond yields had retreated by 0.23% to 4.835% and Australian 3-year bond yields had fallen by 0.29%, closing at 4.48%. These moves caused the domestic yield curve to very slightly “bull-steepen” (shorter-dated yields falling by more than longer-dated yields). Key to the fall in yields later in the month was the release of a weaker employment report for April and a lower than expected Consumer Price Index for April.
• Reflecting moves in relative interest rate expectations (lower in Australia and higher in the US), the Australian dollar eased very slightly compared with the USD, closing the month around USD 0.7185, down from USD 0.7200 at end April.

Key market movements over the month

So far the limited evidence we have regarding the potential impact of the war on the global economy – higher oil prices and resultant higher interest rates – is confined to measures of economic sentiment (household and corporate surveys). But we know these surveys are not always a good guide to actual outcomes.

Compared with the period before the war, these sentiment measures and other market variables such as interest rates have priced an outlook with higher inflation and central bank policy rates. Importantly, growth expectations, which had been severely negatively impacted in the early weeks of the war, have begun to recover, mainly because global economic data has actually been more robust than feared.

While near-term geopolitical uncertainty remains high, there is the possibility of a positive market backdrop upfolding if there’s a potential resolution of the Iran war – this could support a ‘Goldilocks’ backdrop where lower energy prices drive interest rates down (as was the case in late May as oil prices retreated) and drive rising growth and earnings optimism.

For Australia the situation is a bit different, mainly because of the preexisting (pre-war) inflation pressures which have likely only been further exacerbated by the war’s impact on oil prices. No other developed market economy’s central bank has raised rates as much as the RBA this year and we can see the negative impact of these policy moves on the year to date performance of local equity and bond market returns. However, at the stage in the future when the market begins to “look-through” any further potential rate hikes and instead begins to focus on potential medium-term rate cuts, much of the current negative sentiment could lift.

In this monthly update, we look at:

• Resilience of the US economy (which is outperforming forecasts) and solid corporate earnings
• Any signs of an end to the US market’s rally?
• Even European growth expectations seem to have begun to recover
• The US monetary policy outlook is evolving from expected rate cuts to potential rate hikes
• Australian monetary policy rate expectations cool slightly in May as inflation and employment momentum ease
• Australian equity market performance in May – modest total return amidst heightened volatility. But are domestic markets (bonds and equities) beginning to look-through the rate hike cycle?
• The outlook

Resilient US economy (which is outperforming forecasts) and company earnings growth

Despite the uncertainty related to the Middle East conflict, higher inflation fears and market interest rates, contrary to most expectations the US economy seems to be continuing to surprise investors with its resiliency across a broad range of measures.  The chart below shows the Atlanta Federal Reserve Bank’s “GDPNow” estimate of the current (June quarter) growth rate of the US economy. Oscillating around 4%, this measure is significantly higher than the current consensus of key US economists who are presently forecasting a pace closer to 1.5% growth for the current quarter.

GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on publicly available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. The difference in the GDPNow measure of growth compared with consensus GDP expectations – with GDPNow suggesting a growth pace greater than even the most optimistic forecaster – clearly demonstrates how much stronger the US economy is currently expanding compared with consensus expectations.

Evolution of Atlanta Fed GDPNow real GDP estimate for June qtr. 2026 (Quarterly % change (SAAR)

Source: Atlanta Federal Reserve Bank

Not unlike the surprisingly strong current performance of the US economy, US equity markets have continued to perform solidly and are outperforming almost all other markets this year. This performance has been driven by earnings growth, not by valuation expansion (P/E multiple). In fact, Goldman Sachs (GS) analysts estimate that the increase in consensus forward US  EPS estimates has outpaced the S&P 500 index’s price gain this year, resulting in a decline in the P/E multiple over this period.

While the market’s recent return has been driven primarily by earnings strength, both the magnitude and composition of the return has been narrowly-based – since the start of the war on February 27, GS analysts note that the S&P 500 has returned 9% while S&P 500 stocks involved in the AI infrastructure build-out have returned 33%, while the equal-weight S&P 500 has returned just 1%. However, the 33% rally of S&P 500 AI infrastructure stocks has occurred alongside a 30% increase in consensus forward earnings for the group.

Earnings strength has driven the YTD outperformance of the AI infrastructure complex

Source: Goldman Sachs

Any signs of an end to the market’s rally?

The GS analysts note that conditions that have marked the ends of past equity bull markets remain mostly absent today, although some cautionary flags have recently begun to appear (recent surges in investor risk appetite and the performance of the “Momentum” investment factor). While the US market trades at a slightly lower near-term valuation multiple than it did at the start of the year, the P/E remains very elevated relative to history, as does the degree of equity market return and earnings concentration.

In broad terms, there are two recurring dynamics that typically characterise the ends of high-valuation, high-concentration bull markets such as the current one:

• The first is an excess of speculative risk-taking that skews the distribution of future market outcomes to the downside; and
• The second is a deteriorating fundamental backdrop that has historically included a tightening in monetary policy and/or a weakening outlook for earnings growth.

Current equity market valuations, concentration, and recent returns are reminiscent of past overextended markets

Source: Goldman Sachs

Key risks to the market seem to include greater than expected monetary policy tightening (perhaps due to higher inflation), and/or a downturn in macro fundamentals, perhaps driven by the increase in energy prices resulting from the Middle East conflict leading to weaker spending and company margin compression. Regarding the current prospects for these two key factors, presently rate hike expectations are edging only slightly higher, while macro fundamentals seem to be improving not weakening.

Even European growth expectations seem to have begun to recover

The ifo Institute’s Business Climate survey for Germany has long been regarded as a “bellwether” guide to continental European growth prospects. The latest ifo survey for May revealed that sentiment among companies in Germany has more recently recovered slightly following the slump in March and April. Surveyed companies assessed the current business situation as being somewhat more favourable while expectations for the coming months were also less pessimistic. The survey suggests that the German economy is stabilising for the time being, although the situation remains fragile.

ifo Business Climate Germany

Source: ifo Business Survey, May 2026

The US monetary policy outlook is evolving from expected rate cuts to potential rate hikes

As May began, US market participants had partially priced a US central bank rate cut by the end of the year. However, by month’s end this expectation had swung to price a small chance of a rate hike by end 2026. Driving this change in sentiment was the continued resilience of the US economy noted above, but also a slight deterioration in the outlook for inflation with momentum in underlying inflation (median and trimmed mean measures) rising in May as can be seen in the chart below from the Federal Reserve Bank of Cleveland.

Underlying inflation momentum rising again

Source: Cleveland Federal Reserve Bank

This upward trend in inflation can also be seen in the Federal Reserve’s favoured measure of inflation – the Personal Consumption Expenditure deflator – favoured because of the extremely broad base of items included within the measure.

Personal Consumption Expenditure Deflators (annual % change)

Source: US Bureau of Economic Analysis

Australian monetary policy rate expectations cool slightly in May as inflation and employment momentum ease

With the RBA’s official cash rate at 4.10% at the beginning of May, market participants began the month with an expectation that the RBA’s official cash rate (implied by forward market interest rates) would rise to around 4.8% by December 2026 i.e.: at the beginning of May markets were pricing approximately three further 0.25% rate hikes by end year from the then-prevailing official rate of 4.10%. However, by end month the implied end year cash rate had fallen to 4.55% – i.e. an additional one rate hike only compared with the RBA’s 4.35% cash rate (which had risen by 0.25% on May 6).

While the RBA’s rate hike on May 6 likely contributed to some of the reduction in the expected end year rate (with markets perhaps regarding the RBA’s May 6 hike as a “stitch in time” to reduce the likely required number of rate hikes later in the year), also contributing to the decline in rate hike expectations were two weaker data releases – employment and consumer prices.

Coming in weaker than expected, the April labour force report revealed that the number of jobs fell by 18,600 to 14,737,400 people and the unemployment rate increased by 0.2ppt to 4.5%. A slight decline in the participation rate (the labour force expressed as a percentage of the civilian population aged 15 years or more who are  either working or unemployed and looking for work) probably prevented the unemployment rate from rising by more.

Unemployment rate (%)

Also surprising on the downside was the Consumer Price Index which, over the year to April rose by 4.2%, down from 4.6% over the year to March 2026. However, underlying inflation was not as well behaved with the Trimmed mean inflation measure accelerating to 3.4% over the year, up from 3.3% over the year to March 2026. The market however chose to trade in line with the better than expected headline result with market yields falling on the day of the release.

All groups CPI and Trimmed mean, Australia, annual movement (%)

Source: ABS. Note observations from April 2025 are monthly, previously quarterly

Australian equity market performance in May  – modest total return amidst heightened volatility

Australian equities returned a modest +1.15% in May, but this full month return masked significant intra-month volatility and narrow leadership, with eight sessions recording market moves of ±1% or more. The key risk-off event occurred on May 28, when the ASX 200 fell 1.4% as investors,  amid rising oil prices and geopolitical uncertainty, appeared to reduce exposure to cyclically orientated domestic companies, including banks.  The Small Ordinaries index outperformed the S&P ASX 300 over the month.

The monthly return revealed a divergence in performance between commodity-linked earnings resilience (BHP, RIO, Fortescue) and domestic, interest rate-sensitive cyclically orientated companies who are expected to most negatively impacted by the RBA’s rate hikes to date (and potentially to come).

Health Care (-10.3%) was the weakest sector, driven primarily by stock-specific weakness in CSL rather than broad-based selling. Other stocks with negative guidance surprises, such as Brambles (-25%), and ASX (-20%), also performed very poorly over the month.

The Financials sector was also a relatively poorly performing sector with all but ANZ of the four majors providing negative returns for the month.

Interestingly, the Discretionary Retail sector outperformed during the month. Given the RBA’s rate hike early in the month as well as the proposed Capital Gains Tax and negative-gearing changes in the Federal Budget which are expected to negatively impact house prices, on the face of it this was a bit surprising. But perhaps the end month decline in RBA rate hike expectations is leading equity investors to turn their focus to prospective RBA rate cuts (or at least fewer hikes than had been anticipated at the beginning of May).

But we’d caution that other areas of the market that would be expected to outperform as rate hike expectations changed – REITs and long duration stocks – did not outperform over the month.

Relative equity sector returns in May

Source: Macquarie Research, Factset

• OUTLOOK •

We remain cautious about the market outlook.

The US economy seems to have been among the least impacted by the Middle East conflict (so far).  While US interest rates have pushed higher this has not derailed earnings, indeed US earnings have continued to surprise on the upside (albeit narrowly based).

However, at current valuations, the US market needs to navigate a narrow path comprising an economic soft landing (or growth re-acceleration) and gently easing inflation. There is little room for disappointment from either poorer-than-forecast company earnings or more official policy rate hikes than currently expected (which could occur if inflation momentum continues to accelerate).

The market outlook in Australia seems more problematic given the RBA’s current policy tightening cycle.

Last year, as expectations began to move around mid-October 2025 from expecting rate cuts to beginning to expect rate hikes (which have subsequently occurred in 2026), the bond market has sold off with yields on shorter term two-year bonds (which are most sensitive to changes in RBA expectations), rising from 3.29% on October 17, 2026, to 4.57% in mid-May. As this change in the policy outlook has evolved (and actual policy hikes have occurred), so the domestic equity market has found it difficult to advance – in fact the ASX 200 price index (not including dividends) is lower today than it was on October 17 when rate expectations began to change. This represents a material underperformance compared to other markets such as the US.

This highlights how important the policy outlook is for the domestic equity market – if it proves to be the case that market yields and rate hike fears peaked around the beginning of last month, equity market return prospects are likely to brighten. But until investors feel comfortable that the RBA is finished with hiking, the local equity market will likely remain vulnerable to any further loss of economic and earnings momentum that may be caused by the tightening process to date.

On balance, we continue to be cautious about the Australian market outlook, but not significantly underweight. We will become more optimistic once it becomes clear that we are near the end of the rate rises. We are looking for opportunities to invest in high quality companies that have been “unfairly” treated by the market during the current period of volatility. We are also examining current holdings for any companies that we feel could be at risk of earnings downgrades as a consequence of the oil price spike to date, and other market developments.

Read all CIO market updates  | Follow us on LinkedIn | Back to the top ⏫

---

Disclaimer:

SG Hiscock & Company (SGH) has prepared this article for general information purposes only. It does not contain investment recommendations nor provide investment advice. Neither SGH nor its related entities, directors or officers guarantee the performance of the Funds. SGH also doesn’t guarantee the repayment of capital or income invested in the Funds. Past performance is not necessarily indicative of future performance. Professional investment advice can help you determine your risk tolerance as well as your need to attain a particular return on your investment. We strongly encourage you to obtain detailed professional advice. We recommend that you read the relevant Product Disclosure Statement and Target Market Determination, if appropriate, in full before making an investment decision.

SGH publishes information on this platform that is, to the best of its knowledge, current at the time of publication. It is not liable for any direct or indirect losses attributable to omissions, outdated, inaccurate, incomplete or deficient information. Investors and their advisers should make their own enquiries before making investment decisions.