Australia’s Westpac–Melbourne Institute Consumer Sentiment Index dropped 3.5% month-over-month to 80.6 in June 2026, reversing May’s gain and marking its fourth decline this year. Consumer pessimism is deepening.

Cost-of-living pressures remained the dominant drag, with the temporary halving of the fuel excise tax offering only fleeting relief. Household finances weakened sharply: assessments versus a year ago dropped 7.5%, while 12-month expectations slid 8.5%. Views on the broader economy were mixed, with the one-year outlook up 4.9% to 77.8 but the five-year measure down 3.2% to a three-year low.

Source: GS

Westpac economist Matthew Hassan said the impact of three rate hikes this year is increasingly evident, but inflation remains the immediate concern, with energy costs yet to fully feed through. While a pause is possible at the next meeting, Westpac expects further tightening in the year.

Australian consumers remain deeply pessimistic. The latest monthly read is back amongst the weakest seen in the 50-year history of the survey, pessimists outnumbering optimists by nearly 20%. The survey detail shows cost-of-living issues remain front and centre.

Meanwhile, other concerns may be starting to emerge with a sharp drop in house price expectations suggesting some consumers are becoming more unsettled about the impact of recently announced tax changes. The component detail shows big falls in assessments of family finances but more mixed moves around the economic outlook and attitudes towards major purchases.

Recall that the Westpac–Melbourne Institute Consumer Sentiment Index is a composite measure based on five sub-indexes: (1) tracking assessments of family finances compared to a year ago; (2) and (3) tracking expectations for family finances and the economy over the next year; (4) tracking expectations for the economy over the next five years; and (5) tracking responses to whether now is a good time to buy a major household item.

The forward view speaks to particularly acute fears. Australians are more typically moderately positive about prospects for their finances, with an average index read historically of 106.5. There have been barely a handful of sub-85 reads on this sub-index over the last 50 years, one of which was back in April. Australian consumers are clearly bracing for more bad news on the financial front. Notably, the downgraded outlook for family finances came despite a marginal easing in rate rises fears.

Sentiment towards housing remained weak. House price expectations fell 14.9% month on month to below its long-run average for the first time in 3 years. By state, the falls were largest in Sydney (-19%mom) and Melbourne (-18%mom), where actual house prices have been falling. The ‘time to buy a dwelling’ index rebounded 12.6% mom in the month following a sharp drop in May.

The Reserve Bank Monetary Policy Board next meets on 15-16 June. Having raised rates at its previous 3 meetings, the Board is likely to pause in mid-June to assess the impact of the energy price shock and the significant monetary tightening. The negative impact on Australian consumers is becoming clear. However, the Bank’s more pressing concerns are still likely to be around inflation with underlying measures tracking above the RBA’s 2-3% target and the full impact of higher energy costs still to come. While there is room for the Board to take a breather, we may be in store for still another further rate hike in subsequent meetings.

The global economy is set for a significant slowdown this year as higher energy costs weaken consumer spending and business investment, but it could become much more severe if the conflict in the Middle East drags on into 2027.

In a quarterly report on the global outlook, the Organisation for Economic Co-operation and Development (OECD) said worldwide output is likely to grow by only 2.8% in 2026 – even if energy production in the Persian Gulf starts to recover later this month and transport through the Strait of Hormuz returns to normal. That would mark a sharp slowdown from the 3.4% expansion recorded last year.

Source: FT

The OECD said that should the disruption to energy production and shipping stretch into next year, global growth could slide to 2.1% in 2026 and 1.8% in 2027.

If the latter outcome came to pass, it would be the weakest year of growth this century, with the exceptions of 2020 (the Covid-19 pandemic) and 2009 (the GFC).

In this “protracted” scenario, parts of Asia would be among the hardest hit. Much of the energy that usually transits through the Strait of Hormuz is heading for Asian ports. China, Japan and South Korea, among others, have large reserves of oil that have ensured the economic impact of the Strait’s closure has so far been limited.

That would change if the closure was long-lasting. But the impact wouldn’t be confined to those countries most reliant on the Gulf for their energy supplies.

“Many economies in Asia are likely to be hit heavily, reflecting their relatively high reliance on energy inputs from the Gulf economies, but higher inflation, shortages, tighter financial conditions and weaker confidence are also likely to weaken growth significantly in Europe and North America,” the OECD said.

Source: FT

The OECD said the slowdown could be severe enough to push several economies into recession.

Should the conflict prove to be of shorter duration, the OECD continues to expect the US economy to grow by 2% this year, outpacing the eurozone at 0.8% and Japan at 0.6%. It edged up its growth forecast for China to 4.5% (from 4.4% in March).

However, the OECD warned that a protracted disruption to supplies from the Gulf that led to a further rise in energy costs would likely weaken investment in artificial intelligence, which has been a key driver of US economic growth.

It noted that energy accounts for 60% of the costs associated with data centres, while the manufacture of semiconductors requires helium, and a third of the world’s supply of that gas comes from the Gulf. In addition, higher energy costs in Asia would hit production of essential equipment.

“The production of…hardware that underpins AI systems is highly electricity-intensive, reflecting the energy demands of advanced lithography, clean-room operations, and cooling systems,” the OECD said.

As long as the duration of the conflict proves to be relatively short, the OECD said most central banks don’t need to raise their key interest rates. It expects inflation in the Group of 20 leading economies to rise to 4% this year from 3.4% in 2025, but fall back to 3.1% next year.

But if the conflict proves long-lasting, it expects G-20 inflation to be 4.4% this year and 4.7% in 2027. In response, central banks would likely raise their key interest rates by between 50bps and 75bps.

The OECD said those central banks that are reducing their portfolios of bonds purchased under quantitative easing programs may have to suspend that process, and may even have to resume QE to calm bond markets.

This article was originally written by Keith Ford and published on Livewire Markets.

The easy answer for investors looking to avoid the capital gains tax changes announced in the budget would be to pivot their holdings towards income and away from growth.

It’s certainly an option that would make sense, with the overhaul of the capital gains tax rules changing the equation for the post-tax value of an investment.

Even before the official announcement of the changes, modelling was underway to understand how an inflation-adjusted treatment of capital gains would shape investment.

UBS, for example, explained in an equity strategy note that removing the 50% CGT discount would make growth investments “somewhat less attractive”.

“By contrast the relative attractiveness of stocks where returns are more driven by their steady income streams become more interesting under the scenario where the 50% CGT discount is replaced by indexation,” UBS said.

Vertium Asset Management founder Jason Teh agrees, saying that removing the CGT discount shifts the relative attractiveness of income over growth and “levels the playing field that previously heavily favoured growth-oriented investing”.

“For investors, capital gains from growth equities will now be taxed at their full marginal rate (subject to inflation indexation and a 30% floor), rather than at an effective rate of roughly 23.5% for a 47% taxpayer,” Teh explains.

“In contrast, franked dividend income was already taxed at marginal rates. The structural tax advantage of deferring gains inside a growth portfolio has been significantly reduced.

“The effect is most pronounced for investors outside the superannuation system. For individual investors the attractiveness of high-yield, fully franked equities rises on a relative after-tax basis, with the benefit scaling with the marginal tax rate.”

The impact can be seen in the chart below, which compares two strategies earning the same 10% pre-tax return – a dividend strategy as 5% franked yield plus 5% growth and a growth strategy as 10% pure capital growth.

Author’s analysis, modelled with AI assistance. Figures are illustrative and based on proposed 2026–27 Budget measures not yet legislated, assumes a flat marginal rate and a 10% return.

Under the current system, the tax deferral on the lump-sum gain outweighs the drag of yearly dividend tax.

However, with an inflation-adjusted CGT system, the growth strategy’s after-tax returns drop by more than $2,400. In contrast, the dividend strategy barely changes.

Australia is already dividend heavy

While Teh notes that the current system “heavily favoured” growth investing, the dividend imputation system that was introduced in 1987 had already created a more attractive environment for Australian income investors than in other markets.

“Domestic investors unsurprisingly embraced the dividend imputation scheme, with

companies responding by elevating their payout rates,” UBS explained.

“The net result has meant that Australian equities typically pay a dividend yield which is double that of global stocks.”

As things stand, Australia already has the highest payout ratio among major developed markets.

Source: Global X

Now that the latest proposed changes in many cases make a dividend strategy more attractive than a growth-focused strategy, how much more can yields grow?

“At the margin, the shift in tax incentives may tilt capital management decisions toward special dividends over share buybacks,” Teh explains.

“Buybacks deliver returns in the form of capital appreciation, which under the new regime faces a higher effective tax rate, whereas a special dividend with attached franking credits becomes comparatively more tax-efficient for eligible shareholders.

“So, while the overall quantum of dividends is unlikely to surge, the composition of how excess capital is returned could gradually shift in income’s favour.”

Despite the shifting landscape, the Vertium founder says he doesn’t expect the flow of funds to dramatically shift away from growth and into income equities.

“A few mitigating factors are worth noting. First, the changes are largely prospective. Gains accrued prior to 1 July 2027 retain the 50% discount, while post-2027 gains are indexed from the asset’s market value at that date rather than the original purchase price,” Teh says.

“Investors have limited incentive to crystallise positions ahead of the transition, which dampens the prospect of an abrupt fund flow rotation.”

Secondly, the CGT changes don’t affect super funds, so the budget changes won’t “materially alter the calculus for superannuation capital allocation” for either accumulation or pension phase members.

“The rotation will be more visible at the individual retail investor level. For those holding growth equities in their own name outside of super, the after-tax comparison between capital growth and franked income has materially shifted,” Teh adds.

“The CGT changes amount to a straightforward tax grab on capital growth. The logical response is to shelter more capital within superannuation. However, there is a limit to this shelter as those with balances above $3 million will find the new legislated Division 296 tax ensures the government captures a share of that, too.”

Disincentives to growth

Given the franking credit system already provides an incentive for companies to distribute earnings rather than reinvest them in the business, Teh says there is a chance that even more money flowing into income equities could negatively impact long-term returns.

“If the CGT changes accelerate investor demand for income, companies may face growing shareholder pressure to raise dividends or pay special dividends rather than invest in capex, R&D, or acquisitions to grow their business,” he explains.

“This matters because Australia already suffers from chronically weak business investment and productivity growth relative to global peers. A tax system that further rewards distribution over reinvestment risks entrenching that structural weakness.”

It’s no secret that the government is looking to turn around the country’s lagging productivity growth, which is sitting at its lowest level in 60 years.

Labour productivity calculated as GDP per hour worked. GDP data sourced from the ABS between 1964-65 and 2024-25. Hours worked data from Penn World Tables for between 1964-65 and 1973-74 and from the ABS between 1974-75 and 2024-25. 

Source: PC estimates based upon ABS (2026) and Feenstra et al. (2015).

In this context, Teh says it is “difficult to reconcile” the direction of the budget changes with the government’s “ambition to lift productivity and drive a new wave of business investment”.

What are the top yielding stocks?

According to UBS, these are the five S&P/ASX 100 stocks that have maintained the highest average annual dividend yields over the last 10 years:

• Bank of Queensland (BOQ): The bank has a market cap of $4.2 billion and delivered a 10-year average dividend yield of 6.2%.
  
• Stockland (SGP): The property group with a $9.7 billion market cap had an average dividend yield of 6.1%.
  
• Vicinity Centres (VCX): The REIT has a market cap of $11.3 billion and an average yield of 5.9%.
  
• ANZ Group (ANZ): The largest company on the list with a market cap of $111.3 billion, the Big Four bank had an average dividend yield of 5.8%.
  
• Aurizon (AZJ): The rail freight operator has a market cap of $6.8 billion and a dividend yield of 5.8%.

We’ve seen the best and the worst of the base metals sector over the past 15 years, including periods of capital destruction and the more recent era of capital discipline. But the sector’s current backdrop is certainly positive, as surging demand from the artificial intelligence boom, the energy transition and the upswing in defence spending coincide with decades of underinvestment in supply. Copper is a standout.

Source: Trading Economics

Copper demand from hyperscale AI data centres – requiring up to 50,000 tons of copper per facility, compared to 5,000-15,000 tons in conventional data centres – has created a structural deficit projected at 6 million tonnes by 2035. Simultaneously, the effective closure of the Strait of Hormuz from 28 February 2026 has severed approximately 18% of global seaborne sulphur trade, with tanker transit volumes falling 90%. Sulphur is required in the copper refinement process. These concurrent dislocations create an interesting investment thesis characterized by supply-demand asymmetries and geopolitical risk premiums.

Price Relativities and Correlations

Copper-AI Demand Nexus: Copper prices have surged to record highs, driven by a perfect storm of supply fragmentation and AI infrastructure buildout. A single Nvidia DGX GB200 server rack contains over two miles of copper cables; North American data centre construction represents an entirely new demand vector – one that did not materially exist five years ago and is growing faster than supply-side responses can accommodate.

The correlation between copper prices and AI capex cycles is growing, but the relationship is structurally asymmetric: AI infrastructure buildout is irreversible once committed, whereas copper demand elasticity is low at current price levels. This creates a ratchet effect—prices cannot easily reset downward without destroying marginal production, particularly in high-cost jurisdictions.

Sulphur Supply Shock

Approximately 20% of global copper supply relies on sulphuric acid leaching of oxide ores, with 50% of global seaborne sulphur supply cut off by the Strait of Hormuz closure. Qatar’s Ras Laffan alone previously processed 70 million cubic metres per day of natural gas, generating significant sulphur by-products; the combined effect with phosphate supply constraints has produced the most severe global phosphate-fertilizer disruption since 2008. The Ras Laffan facility remains severely damaged following Iranian missile and drone strikes.

The sulphur-copper correlation is indirect but operationally critical: sulphuric acid cost inflation acts as a supply-side cost floor for oxidic copper producers, while simultaneously constraining fertilizer availability – creating inflation pressures across energy, agriculture, and technology sectors. Shipping constraints could exert further upward pressure once existing inventory is exhausted, given unlike oil and gas, sulphur cannot move via pipeline and must ship as dry bulk freight.

Australian investor perspective

Australia occupies a favourable position within this strategic framework, presenting several distinct advantages:

• Geographic insulation and supply chain diversification: Australian-based copper exposure pivots supply chains away from Hormuz-dependent logistics corridors. WA’s tier-1 copper assets operate via Pacific-facing supply chains, reducing exposure to Middle Eastern route disruption and war risk insurance escalation. This creates a quality-of-supply premium that institutional capital is increasingly pricing.
• Currency and macroeconomic tailwinds: The Australian Dollar has appreciated modestly against the USD, but Australian commodity exporters benefit from AUD weakness relative to the marginal cost base of global copper producers. Australian producers price in AUD terms while monetizing USD-denominated commodity revenues, a structural carry that compounds with copper price strength.
• Sulphur supply chain and phosphate leverage: Australia is a fertilizer importer, implying exposure to global phosphate and sulphur supply constraints. Australian agricultural and mining operators face material input cost inflation; while this creates opportunities in entities that can partially offset input cost exposure (e.g., integrated agricultural-mining conglomerates, or mining producers with hedging optionality), it is a headwind for most. Conversely, Australian phosphate companies (small but present) and sulphur trading operations benefit from pricing power.
• Australian investors can access exposure via Rio, BHP, and smaller focused copper producers. The analyst consensus on copper fundamentals has probably underpriced the structural duration of the AI-driven demand wave. Taking contrarian, duration-weighted positions in established Australian-listed copper equities (on a hedged AUD basis for international comparison) offers opportunities.
• Policy and investment environment: Australia’s mining investment framework, regulatory stability, and tax treatment (relative to emerging market jurisdictions exposed to copper production, e.g. in Africa) create a structural governance premium. As investors increase copper exposure, the marginal dollar flows toward jurisdictions with transparent tax treatment and low political risk, a category in which Australia still scores moderately favourably.
• Renewable energy and grid transition: Australia’s renewable energy transition is capital-intensive and copper-hungry; it also operates independently of Hormuz disruption. Australia captures both the AI infrastructure demand wave and the energy transition copper demand in a single exposure. This dual leverage is possibly underappreciated by markets.
• Time horizon: The structural supply deficit extends to 2035+; prudent investors should probably assume a 5+ year holding horizon. Quarterly volatility driven by geopolitical events should be anticipated.
• Geopolitical events should be monitored: We keep track of Hormuz transit data, geopolitical event trackers, and Chinese infrastructure capex announcements, the three macro variables with highest explanatory power over 6-month copper price movements.

CONCLUSION: stay long Dr Copper

The copper market is transitioning from a cyclical shortage to a secular supply-deficit regime. AI infrastructure capex is the marginal demand driver; sulphur disruption is the marginal supply constraint. Australian investors, given geographic insulation, currency characteristics, and depth in mining equities, are well positioned to capture value via this transition. Execution requires patience, discipline, and contrarian positioning during volatility events—but the risk-reward profile remains positive through to 2030.

The government plans to remove negative gearing to help renters buy homes. For those who remain renters, the wrong levers are being pulled

Rent is the defining issue of Australia’s cost of living crisis. It has risen nearly 40% since 2020 and is consuming a record share of household income. The root cause of the rental crisis is the gap between the number of people who need housing and the number of dwellings being built to house them. The chart below shows an uncomfortable truth: annualised net overseas migration against total dwelling completions from 1996 to the present.

Source: FactSet, Vertium

Despite net migration coming off its record breaking 2022-23 peak, it is still running at an elevated level around 311,000 per year. Total dwelling completions are running at approximately 175,000, slightly below pre-COVID levels. The gap between demand and supply represents the structural shortfall that is driving rental inflation. Net migration and dwelling completions capture the core drivers of rental supply and demand. Adjusting for other factors such as household formation rates, the proportion of completions available for rent, or changes in existing rental stock would refine the analysis but not change the broad conclusion.

Over three decades, total dwelling completions have moved within a relatively narrow band, averaging about 165,000 per year. This stability is driven by house completions, which have been anchored at around 105,000 throughout. Apartment completions are more volatile — surging from around 30% of total completions prior to 2010 to nearly 50% at the 2017 peak before settling back to around 35%. But because they represent the smaller share of total completions, their volatility is dampened at the aggregate level.

Source: FactSet, Vertium

The Simple Economics of Rent

While apartments represent the smaller share of completions, they matter because they deliver supply at a volume detached housing cannot match. A single high-rise approval can yield hundreds of dwellings on a hectare of land where detached housing yields around fifteen. When the apartment pipeline runs at capacity, rental supply grows fast enough to absorb population growth and rents ease. When it stalls, nothing else compensates for the volume lost. Apartments are the release valve — and investor presale demand is the mechanism that opens it. The chart below plots the ratio of net overseas migration to apartment completions against CPI rent growth from 1997 to the present. The relationship between the two is unmistakable.

Source: FactSet, Vertium

Two Rent Booms

Australia has experienced two distinct episodes of severe rental inflation, one before the 2008 Global Financial Crisis (GFC) and one after the 2020 COVID pandemic. The underlying drivers were virtually identical: strong net overseas migration landing in a market where dwelling completions could not keep pace. The following chart shows the 3-year change in annual net migration and apartment completions to highlight the gap between demand and supply.

Source: FactSet, Vertium

In the pre-GFC episode, Australia’s resources boom led to net overseas migration accelerating sharply, lifting net migration from 2006, while multi-dwelling completions experienced a decline. The migration-to-completions ratio rose sharply, and CPI rents surged. Rents eventually stabilised as migration fell in the aftermath of the resources bust. Lower rates used to stimulate the economy during the GFC also encouraged housing supply, which gradually rebalanced the housing market and further eased rent growth.

The post-COVID episode followed the same script, only more severely. Net overseas migration surged, eclipsing the migration dip during the lockdowns. This demand landed in a rental market where the supply pipeline had been hollowing out for years, compounded by post-COVID supply chain problems that extended construction timelines.

Despite comparable peak CPI rent growth of around 8% for both episodes, the post-COVID episode has felt far worse for renters. In the mid-2000s, the resources boom delivered strong economic growth and wages broadly kept pace with rising rents. After COVID, the picture reversed. Lacklustre economic growth and weak productivity left wages struggling, while inflation pushed workers into higher tax brackets. Bracket creep is eroding after-tax purchasing power. Full-time workers are now paying an average of 20% of their income in tax, the highest in over two decades. The result is that renters facing a 40% surge in rents since 2020 have done so with after-tax incomes that have barely moved in real terms. Australian households are now dedicating a record 33% of household income to rent, nearly double the 18% recorded in 2007-08. The rental crisis is not just a housing problem — it is the cost-of-living crisis.

Rent Relief Period

It was not always this way. Between these two rent booms sits an episode of genuine rental relief. Falling interest rates from 2012 fuelled strong capital gains expectations for housing, which in turn produced a boom in investor lending. The major banks — Commonwealth Bank, National Australia Bank, Westpac and ANZ Group — were the engine of this boom, growing their investor mortgage books aggressively as demand surged. By early 2017, interest-only loans represented 64% of all new investor lending. This capital funded a record apartment construction pipeline. Critically, this supply boom occurred despite the restrictive planning rules commentators today cite as the primary impediment to new supply. When investor lending economics were favourable, the market found a way.

The surge in apartment supply produced a prolonged period of subdued rent growth from 2016 to 2020. Completions surged while net migration was subdued and the ratio fell. CPI rent growth approached zero. For renters, it was genuine relief delivered entirely by private investor capital responding to market incentives.

While renters benefited from the excess supply, APRA grew concerned about the housing boom. Worried about systemic risk from concentrated interest-only lending, APRA imposed a cap in March 2017 limiting interest-only loans to no more than 30% of new residential mortgages. The major banks were forced to reprice interest-only loans higher and restrict approvals, directly curtailing the investor lending that had been driving apartment supply. Investor loan growth collapsed. The apartment presale market, which depends on investor buyers to unlock construction finance, dried up. The supply pipeline that had been delivering rental relief collapsed almost overnight. Fortunately, net migration remained stable and rents held steady.

The Missing Policy

The lesson from thirty years of data is clear: reducing rent inflation requires pulling two levers.

Lever one: reduce population growth

Immigration is one of Australia’s great economic strengths. It brings skills, diversity and long-run productivity benefits. But like any good policy taken to an extreme, the costs eventually outweigh the benefits. Annual net migration running at 311,000 into a market completing 175,000 annual dwellings is not an immigration policy — it is a housing and cost of living crisis. Moderating migration to levels the housing stock can absorb reduces rental demand pressure directly and immediately. The international evidence is unambiguous. New Zealand, Canada and the United States all cut immigration materially in 2024-25, and in each case rental inflation decelerated sharply within months. Migration is the demand lever governments can pull immediately.

Lever two: incentivise investor lending for new builds

Investor credit conditions drove the 2013-2017 apartment supply boom. Unless the government plans to subsidise every dwelling itself, it needs to unleash the private sector. The new build negative gearing exemption creates the right incentive. For listed residential developers like Mirvac and Stockland, the exemption is a potential demand tailwind, but making it work requires credit conditions that allow investors to act on it. Today, those credit conditions are more restrictive than at any point during the 2013-2017 boom.

APRA should consider reducing the 3% serviceability buffer that was set for emergency interest rates in 2021. Now that the cash rate has normalised, the serviceability buffer is suppressing the investor borrowing capacity that drives apartment supply. More importantly, the single most effective policy lever to recreate the apartment supply boom is lower interest rates. But the RBA cannot cut rates in an environment where government spending is stoking demand. Every dollar of government spending that adds to inflation delays the rate cuts that would unlock investor lending for new builds and ease the rental crisis.

Yet the government’s supply response largely bypasses the private sector. The National Housing Accord, announced in October 2022, targets 1.2 million new homes over five years, or 240,000 completions per year. The problem is that the absolute peak of the greatest investor lending boom in Australian history delivered only 223,000 completions in the year to March 2017. The reason the target will likely be missed is simple: the Accord offers very little incentive to the private market that drives apartment supply. Its spending is overwhelmingly directed at social and affordable housing. The Accord contains no mechanism that replicates the credit conditions which produced the only episode of genuine rental relief.

Conclusion

The supply-demand framework is not complicated. Rents rise when migration outpaces housing supply and fall when supply catches up. History has demonstrated this in Australia and the international evidence confirms it is not unique to this country.

What is complicated is the political will to pull the levers that work. Moderating migration, recreating the credit conditions that built the last apartment boom, and resisting fiscal spending that keeps inflation elevated and delays rate cuts that would unlock private sector construction — these are the levers that move rents. Until those levers are pulled, the negative gearing reform will have little impact and Australia’s cost of living crisis will remain unresolved for the third of Australians who rent.

The S&P 500 (the most significant global sharemarket bellwether) climbed 10% in April – its biggest monthly jump since the November 2020 Covid-19 vaccine breakthrough – as the market rebounded from the sell-off triggered by spiking energy prices as the Middle East conflict erupted.

US Tech Booming

Technology stocks have powered the global equity comeback, sending the tech-heavy Nasdaq index surging 15% in April, its best month since April 2020. Analysts revised their profit forecasts to new highs, banking on booming AI infrastructure spending by the Magnificent 7 to support economic growth, with earnings upgrades extended across multiple sectors; even the Dow Jones rose by 7%.

Mega-cap tech continues to deliver exceptional earnings growth, and investors focused on revenues as an indicator of return on AI investment spending. Amazon, Alphabet, Meta and Microsoft have reported collective revenue growth of 20% and earnings growth of 60% this quarter (although “other income” driven by private equity investments contributed a record 1/3 of those profits). Within this group, share price performance mirrored revenue results and guidance. These four companies (GOOGL, MSFT, AMZN, and META) represented close to $12 trillion in market cap – larger than the equity markets of the United Kingdom, France, the Netherlands and Australia combined.

The AI capex boom shows no sign of slowing. Analyst estimates for 2026 AI hyperscaler capex spending total $700 – $750 billion, 80% above spending in 2025. The surge in spending estimates is driving a similar rise in earnings estimates for AI infrastructure companies, helping lift the earnings outlook for the broad market and skewing risks to S&P 500 earnings estimates to the upside.

Global Equities

The Iran war will continue to be a principal factor in markets. Despite the ongoing and fragile ceasefire, the situation stays fluid and oil flows through the Strait of Hormuz remain extremely low, with risks to economies and markets growing the longer these supply disruptions continue.

Globally, market expectations are for real GDP growth of ~3.1% year-on-year in 2026 amid growing headwinds from higher energy prices. Global core inflation is expected to decline to ~2.4% by the end of 2026, reflecting a fading tariff boost and further normalisation in housing and wages inflation but boosted by higher energy prices.

Continued earnings growth in the US could drive equity market appreciation through to year-end. Tactically, however, sharply narrowing breadth, with most gains concentrated in the tech giants, has historically indicated equity market risk. Elevated equity investor positioning today adds to that risk.

Nevertheless, the enthusiasm was widespread with many other countries experiencing exceptional gains: Japan up 16%, Germany +7%, China +8% and France +4%. Australia and Britain dragged the chain with gains of only 2%.

We expect the Fed to deliver at least one, and maybe two 25bp cuts this year for a terminal rate range of 3-3.25%, although the risks to this forecast are probably tilted toward a longer pause.

In the Euro area, markets predict below-potential real GDP growth of 0.9% in 2026, reflecting higher energy prices and tighter financial conditions owing to the Iran conflict. We expect core inflation to rise in 3Q26 and remain there for the rest of the year amid higher energy prices, and the ECB to deliver further rate hikes to combat inflation before cutting back in 2027.

In China, real GDP growth of 4.5-5.0% in 2026 is likely, as resilient export growth, continued government policy easing, and a decreasing drag from the ongoing property market downturn offset headwinds from higher energy prices and sluggish domestic demand.

Australian Inflationary Pressures

In Australia, the Q1 CPI report provided the first official estimate of the impact on local prices of the Middle East conflict. Headline inflation accelerated sharply to 4.6% year-on-year on the back of a 33% surge in auto fuel prices in March alone. Fortunately, a portion of this spike has since unwound following the fuel excise cut, although fuel prices are still materially above the pre-conflict level.

While there were signs of price pressures across home-building, vehicle repair and insurance, it is too early to find evidence of pass-through. That said, the underlying trimmed mean inflation rose 0.8% in Q1, with annual growth at 3.5% year-on-year, a full percentage point above midpoint of the target range. Notably, March’s data pre-dates the wide range of price increases reported for building products and other items which came into effect in April.

Following the CPI release, the futures markets expect the RBA to increase cash rates by 25bps to 4.35% at the May policy meeting. The combination of an elevated starting point for inflation and risk of pass-through will likely compel the RBA to act pre-emptively to hold inflation. This is notwithstanding the Budget to be delivered on 12 May, which could have significant consequences for future monetary policy.

Australian Business and Consumer Sentiment

The Westpac–Melbourne Institute Consumer Sentiment Index fell heavily in April, declining 12.5%. This is a sobering data point and highlights the despondency affecting Australian households amid rising petrol prices, increasing food costs and the threat of higher interest rates.

Coming in quick succession was the double blow to confidence: first the collapse in consumer sentiment, followed shortly after by a plunge in business sentiment. The business survey by NAB, the first since the war in the Middle East broke out, also showed confidence collapsing. Business confidence recorded the second largest monthly fall on record.

The poor sentiment measures are common across virtually all major industrialised economies, even as business investment and consumer spending have generally held up.

How to Reconcile Poor Sentiment but Resilient Spending?

This widespread despondency among both business and household sentiment measures suggests “confidence” is collapsing under the burden of unaffordable prices, war, tariffs, rising oil prices, climate anxiety, inter-generational resentment, and toxic political leadership. Yet US consumers absorbed tariffs through lowering their savings rates and are increasing spending; German retail sales are higher than pre-pandemic levels; the same is true in Australia and the UK.

Perhaps part of the answer lies in the spread of social media, with the combination of fake news and negative sensationalism. “Doom-scrolling” through the news feed on phones is commonplace. That informs the sentiment numbers of business media report; however, it seems increasingly likely that consumers have also recalibrated their spending patterns. When it comes to economic actions, perhaps most people can distinguish what they see on their phones from reality.

Commodity Markets

The World Bank’s Commodity Markets Outlook, published in late April, presents a detailed picture of one of the Middle East war’s most important global economic consequences, namely its impact on supplies and prices of major commodities including oil, LNG, fertilizer, sulphur, refined petroleum products and much else.

The blockage of the Strait of Hormuz created a historic shock to commodity markets, and resulted in the largest monthly oil supply loss on record in March. Assuming the most acute phase of commodity trade disruptions ends in May or June, with shipping volumes transiting through the Strait of Hormuz gradually returning to near pre-war levels by October, the World Bank projects average commodity prices to rise by 16% this year – the first annual increase since 2022. This would leave prices about 25% higher than expected in January 2026.

Commodity prices were mixed across April, with Crude Oil up around 4%, Brent up around 7%, while Gold, Silver and Platinum all fell slightly. Copper was up 7%, and iron ore managed to stay above US$100/t.

In our view, the medium-term thesis for firm commodity prices is still intact: fiscal expansion, rearmament, electrification, AI-related infrastructure build-out and currency debasement dynamics are supportive of real assets.

Global sovereign yields rose over the month as markets factored in the inflationary pressures from the energy shock. US 10-year Treasuries ended April at 4.37% (up 6bps), Australian 10 years at 5.01% (up 9bps), UK gilts at 5.01% (up 16bps), and German bunds at 3.04% (up 4bps). With the uncertainty created by the war, we expect rising volatility in bond markets as oil prices, inflationary pressures, hits to confidence, and supply disruptions endure.

The Australian dollar was higher against the USD and ended the month at US$0.72.

Conclusion

As always, we suggest a prudent policy of asset class diversification, a focus on quality and sustainable yield, and a strategy of riding out short-term market volatility by focusing on long-term performance.

The Westpac–Melbourne Institute Consumer Sentiment Index rose 3.5% to 83 in May from 80.1 in April. While sentiment ticked up slightly in May, pessimists still outnumber optimists by 20%. Positives around lower fuel prices were offset by the negative effect from latest RBA rate hike. The Budget impact looks to have been mixed for sentiment overall, but with few expecting to see any associated boost to finances and homebuyer sentiment down sharply. But it depends on who you talk to with generational differences becoming starker.

Source: Westpac

The Key Findings:

• Westpac Consumer Sentiment Index up 3.5% to 83 as fuel shock eases.
• Improved assessment of finances but more downbeat on economy.
• Budget impact on finances seen as more negative than last year.
• Job loss fears remain elevated despite some improvement.
• Homebuyer sentiment down sharply to deeply pessimistic levels.
• Consumer house price expectations soften but still positive.
• Widening sentiment gap between young and old.

Despite a small improvement, consumers remain deeply pessimistic. Some of last month’s shock from the spike in fuel prices has eased. The temporary halving in fuel excise tax has helped to reduce average pump prices by nearly 30¢/litre since April. However, this positive was largely offset by the RBA’s 25bp rate hike, the third rate rise in as many meetings.

Meanwhile, the impact of the Federal Budget looks to have contradictory – with scepticism from older people and more acceptance from younger respondents. Total responses over the course of the survey week showed a slight improvement in sentiment following the budget announcement, despite few consumers expecting to benefit directly.

Since 2010, Westpac’s budget month surveys have asked respondents whether they expect the announcement to improve or worsen their finances over the year ahead. It’s fair to say that Budgets in general are not often popular: responses typically show a heavy negative response – over the last 16 years, the proportion expecting to be worse off has, on average, been 20% higher than the proportion expecting to benefit. This year, the gap was 21%, with 15% of consumers expecting to be better off and 34% expecting to be worse off. While that’s typical, it is a deterioration on the 10% gap last year, and well down on the 3% gap in 2024 when the ‘stage 3’ tax cuts were announced.

The budget’s “intergenerational” themes this year showed a notable skew in responses across age groups. Among baby boomers and Generation X, those expecting to be worse off outnumbered those expecting to benefit by 30–36% compared with a gap of just 9% for Millennials and small net positive spread among Generation Z.

Generational differences are also stark for sentiment more broadly. Index reads across the baby boomer and Generation X cohorts are extremely week, at just below 70. In contrast, sentiment amongst Millennials is only modestly pessimistic, with an average index read of 94.6, and is outright positive for Generation Z at 104. Note: sentiment generally declines with age, moving 1% lower every two years. However, the generational gap has widened materially in 2026.

Meanwhile, Australian long bonds continue to surge in yield, foretelling of future pain for borrowers and mortgage holders. From under 4% in November last year, to over 5% now, the 10 year bond yield portends rate pains ahead, not the tonic that consumer sentiment was looking for.

Source: Trading Economics

It’s not just Australia: global bonds are surging. We addressed this in our last QB (see here: https://clime.com.au/quick-bites-rising-bond-yields-threatens-markets/ ).

First, there is the growing fear about soaring government debt, rising populism and the lack of political will to get government spending under control. This is true in Australia, but even more so in most of Europe, the UK, the US and Japan.

But these fears are being compounded by the threat of inflationary pressures driven by the war in the Middle East. This pain is hitting different countries in different ways, but the ripple effects are real, and they are spreading across products, markets and services.

In Australia, there are concerns about the sustainability of federal and state government budgets (especially in Victoria which has endured a decade of undisciplined spending). Inflation is spreading across the economy, with little restraint from labour markets or the public sector. The effect of energy price rises is yet to be fully felt, and impacts are likely to continue for months at the least, and years in some sectors.

The question marks introduced in the Federal Budget over capital gains tax, negative gearing, and minimum tax on certain trusts, appears to be creating more uncertainty than confidence that this government is on the right track.

Global sharemarkets have come under pressure as a sharp bond sell-off has taken hold. In recent days, we have seen the benchmark US 10-year Treasury yield above 4.6%. In Japan, we see their 30-year yield reaching 4% for the first time. In the UK, long bond yields have hit 28-year highs. In Australia, we note 10 year government bonds above 5.0% (at time of writing, 5.048%).

Source: Goldman Sachs

Inflation is the key driver of long bond rates, but there are many other drivers as well: inflation expectations; monetary policy (one could include specific programs such as Quantitative Easing under this heading); economic growth trends and the expected growth trajectory; and lastly, what we could term “fiscal health”, that is the issuance and supply by governments. Large fiscal deficits require increased debt supply, which requires higher yields to attract sufficient market clearing capacity.

Source: IMF, WSJ

Pressure on Bonds

Tumbling bond prices have pushed yields on government debt higher, lifting borrowing costs for governments, businesses and consumers alike. As mentioned, the main driver has been the surge in energy prices since the Middle East conflict started at the end of February, which has lifted inflation and talk of interest-rate increases by central banks. But concerns about the fiscal outlook in Japan and the UK have also added to the bond-market selloff in recent days.

Source: FT

In the US, federal debt held by the public just climbed above 100% of GDP for the first time since the aftermath of World War II.

The global picture

Countries across the globe are dealing with ageing populations and pressure to increase military spending. Taken together, the debt of advanced economies is growing as a percentage of their collective GDP, according to the International Monetary Fund. 

Source: Ed Yardeni

In this QB, we deal selectively with the issue in the interests of keeping the article “quick”. Key to recent trends is the inflationary pressure caused by the energy shock. Oil prices have climbed above US$105 per barrel after US-China talks failed to ease tensions surrounding the Strait of Hormuz blockade. Energy costs are flowing through to all sorts of products and services, evidenced by recent data for the month of April.

Source: Bloomberg

Investors are increasingly questioning whether richly valued equities can continue rising amid persistent inflation, elevated energy prices and tightening financial conditions, raising fears of a broader market repricing and potential stagflation risks.

The 2-month correlation between US equities and US 10y yields turned the most negative since the late 1990s (see chart below).

Source: Goldman Sachs

The equity market’s response to rising bond yields has tended to be closely linked to the source, speed, and starting level of the yield move. Since the start of the Middle East war and the ensuing energy price shock, markets have seen inflation rather than growth as the main source of macro shocks.

Rising yields are typically the result of either faster growth or rising inflation. Yields going up due to better growth are usually digested well by equities (as growth optimism can help buffer discount rate headwinds), whereas in an inflation-led rate environment the equity/bond yield correlation turns negative. Unlike the past, higher growth expectations due to micro (e.g. AI investment) rather than macro catalysts have supported equity prices since April.

The theoretical underpinning of the relationship between bonds and equities is fairly well understood. Rising bond yields due to inflation exert downward pressure on equity valuations. This is primarily through the discount rate used in DCF (Discounted Cash Flow) valuation models used by professionals.

As the “risk-free” rate rises, the cost of equity increases. This compresses the Present Value of future corporate cash flows. Furthermore, elevated yields compress the equity risk premium, attracting capital from equities and into fixed income to secure attractive, risk-adjusted returns. More intuitively, we understand that the rising cost of debt affects all economic activity, punishing borrowers and suppressing general economic activity.

Yields on all government debt are influenced by what investors think short-term interest rates (set by central banks) will average over the life of a bond. Investors, though, typically demand higher yields to hold longer-term bonds, due to the risk that inflation and interest rates could surge unexpectedly in the future.

Ed Yardeni’s opinion

Ed Yardeni, an investment strategist that I rate highly, said the US Fed should remove its easing bias at its June meeting, given that it is “no longer” appropriate in the current market environment.

“If the Fed fails to remove it, investors will conclude that the central bank is falling behind the inflation curve and will demand a higher inflation risk premium,” Yardeni wrote in a note. “We expect the Fed to hold rates unchanged at the June meeting and shift to a tightening policy stance.”

Higher rates in countries outside the US are weakening a key source of demand for Treasuries, forcing the US government to compete harder for buyers at a time of large fiscal deficits and persistent inflation concerns.

The view that the Fed may have to delay rate cuts or even raise borrowing costs is disrupting confidence in sharemarket valuations.

The new Fed Chair Kevin Warsh might make a difference: if he is able to contain long-term Treasury yields, perhaps through a new program of Quantitative Easing, the market would be soothed.

“By acting hawkishly, Warsh might have a chance of delivering what the White House wants: lower real-world borrowing costs,” Yardeni wrote. “Mortgage rates could fall, corporate financing would ease, and Trump can point to declining long-term yields as the economic win.”

In Do Geopolitical Oil Shocks Cause Equity Bear Markets? we argued that oil shocks alone do not cause bear markets — the outcome depends on the macro backdrop when the shock arrives. The question that naturally follows: now that US earnings season is largely complete, has the Hormuz crisis left any mark on corporate earnings? The short answer, noted in US Corporate Earnings Surge Drives Markets, is that US earnings are surging despite the crisis. But to understand why the oil shock has failed to derail corporate profits, the 2022 episode is the critical reference point.

In 2022, the Ukraine invasion led to the oil price spiking to US$120/bbl. It occurred at a time when S&P 500 earnings growth was decelerating. The post-COVID surge was losing steam and the economy was entering a quiet manufacturing recession that would last nearly three years. Technology stocks were simultaneously hit by stock-specific earnings downgrades that compounded the market’s pain. The S&P 500 recorded its worst annual return since the 2009 Global Financial Crisis.

Source: FactSet

The 2026 Hormuz crisis also led to an oil spike, but arrived into a very different earnings environment. Coming out of 2025, S&P 500 earnings growth was accelerating. With 89% of the index having reported Q1 2026 results, forward earnings estimates have been revised upward throughout the reporting season. The current S&P 500 next twelve months earnings per share (EPS) growth of 25% is one of the highest on record, trailing only the historic rebounds following the 2009 Global Financial Crisis and the 2020 COVID pandemic.

Technology Leads

The surge in S&P 500 earnings growth has been led by technology stocks, which comprise about 40% of the index. The Nasdaq EPS is running at 38% annual growth. Within the sector, the standout is semiconductors, with EPS surging 132% on the back of hyperscaler capex commitments. Semiconductors alone now account for about 15% of the S&P 500 — more than the Energy, Materials, and Utilities sectors combined — which means the earnings acceleration in chips flows directly through to the aggregate index.

Source: FactSet

Manufacturing recovery

The S&P 500 earnings surge is broader than the technology sector alone. The Russell 2000 small-cap index is also posting improving earnings growth. The reason for this is not hard to find. Small caps have a far greater exposure to the domestic manufacturing and industrial cycle than the large-cap, tech-heavy index, which means their earnings are a direct read on the health of the US goods economy.

From November 2022 through December 2024, the ISM Manufacturing Index was below 50 for 26 consecutive months, the longest contraction on record. This was the post-COVID industrial hangover. Manufacturers overproduced, inventories bloated, and the cycle corrected quietly while the headline economy held up through services and labour markets.

The cycle has now turned. The ISM Manufacturing PMI moved above 50 in January 2026 for the first time in over two years, and has remained in expansion territory since. New orders have expanded for three consecutive months, confirming the recovery has momentum.

Source: FactSet

In early-cycle recoveries, volumes rise against a largely fixed cost base, producing sharp earnings acceleration for companies linked to the manufacturing cycle. Pent-up operating leverage is now unwinding, and the Russell 2000 is posting annual earnings growth of just under 30% after two years of moribund growth. The earnings of J.B. Hunt Transport Services (JBHT) illustrate this dynamic most vividly.

Source: FactSet

The largest US intermodal and truckload operator, JBHT is one of the most inextricably tied companies to the manufacturing cycle. Trucking companies are the lifeblood of the manufacturing economy, moving raw materials in and finished goods out, which makes their earnings one of the most reliable proxies for the health of the broader economy beyond large-cap technology. The Q1 2026 results bear this out. JBHT posted diluted EPS of $1.49, up 27% from $1.17 a year ago. Intermodal loads hit a first-quarter record, with management characterising demand strength as broad-based. These are not the numbers of an economy being derailed by an oil shock.

Conclusion

In late 1973, the oil shock delivered a killing blow to an economy already contracting and an index dominated by energy-intensive industrials. In early 2022, it arrived as the manufacturing cycle and technology earnings were rolling over. In both cases, the macro was already deteriorating when crude spiked.

In 2026, the oil shock arrived in the middle of a hyperscaler capex boom and a manufacturing sector in its early months of expansion. Earnings growth is accelerating, breadth is widening, and the reporting season has so far absorbed the crisis without visible damage.

The Hormuz risk has not disappeared. A prolonged closure that embeds inflation and forces central banks higher could still slow the economy. But the earnings starting point is fundamentally different from either precedent. With the two pillars of the earnings recovery — semiconductor demand and the manufacturing cycle — still intact, we could be in the early innings of an S&P 500 earnings expansion that the oil spike has so far failed to interrupt.

Many people feel emotionally and mentally exhausted, with news of war in the Middle East, Trump’s unsettling tweets, rising inflation and interest rates, political infighting and a toxic social environment. But the low scores on sentiment indexes for both businesses and households in many developed countries (including Australia) are not affecting markets. The stark reality is that markets are driven primarily by earnings, and US corporate earnings are surging.

S&P 500 over last 5 years

Source: Trading Economics

Is it any surprise that US sharemarkets are reaching all-time highs? At this late stage of the Q1 earnings season, the S&P 500 continues to report very impressive results. Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above recent averages. In addition, the index is reporting its highest earnings growth rate since Q4 2021.

Overall, 89% of the companies in the S&P 500 have reported results for Q1 2026 to date. Of these companies, 84% have reported EPS above estimates. If 84% ends up being the number for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since 2021. In aggregate, companies are reporting earnings that are ~18% above estimates.

Source: FactSet

The positive EPS surprises reported by 3 of the “Magnificent 7” companies (Alphabet, Amazon and Meta) have been the largest contributors to the increase in the overall earnings growth rate for the index over this period. Note, however, that a portion of these earnings are their own market valuations of unlisted investments, which has distorted results in an upward direction.

Another caveat: markets are highly concentrated, and the share of S&P 500 profits captured by the 10 largest companies has doubled since 1996, see chart below. The S&P 500 is not a diversified index like it used to be: it is dominated by a small number of extraordinarily profitable tech companies.

Source: Apollo, Torsten Slok

Nevertheless, ten of the 11 major sectors are reporting year-over-year earnings growth: 7 are reporting double-digit earnings growth, led by the IT, Communication Services, Materials, and Consumer Discretionary sectors. On the other hand, Health Care is the only sector reporting a year-over-year decline in earnings.

Source: FactSet

Industry analysts’ consensus Q1-2026 earnings forecasts for the S&P 500 companies in aggregate represent growth of 18% y/y, while their full-year estimates imply 2026 growth of 24%, well above the 12% and 13% posted in 2024 and 2025. The growth expected in 2027 is 15%.

Source: Yardeni Research

The forward 12-month P/E ratio is 21.0, which is above the 5-year average (19.9) and above the 10-year average (18.9).

An interesting view of global markets on a sector/style basis relative to long term PE valuations over 20 years:

Source: Moelis, Goldman Sachs