Investment & Economic Review October 2026
If the June quarter was a tale of two markets, the September quarter was a lesson in how quickly a fragile peace can unravel. The memorandum of understanding that reopened the Strait of Hormuz in June lasted barely three weeks. On 8 July the ceasefire collapsed after renewed attacks on commercial shipping and retaliatory US strikes. Within days Iran had again declared the strait closed, the United States had reinstated its naval blockade of Iranian ports, and Tehran subsequently suspended its commitments under the agreement. Escalation through August and September pushed the conflict into a more dangerous phase, Iran-backed Houthi rebels took control of the Bab al-Mandeb Strait at the mouth of the Red Sea, and drone attacks forced Saudi Arabia to shut its East-West pipeline, one of the main routes it had been using to bypass Hormuz.
Once again, the oil price tells the story best. Having retreated to about US$72 a barrel in late June, Brent crude was back above US$100 by late July and peaked at about US$108 in mid-September while physical cargoes changed hands at considerably higher prices. Oil remains substantially higher than three months earlier. The ‘war premium’ we described as having markedly deflated in July has returned with interest, and with it the stagflation risk we cautioned about in April.
The economic consequences have been swift, exacerbating the already worryingly weak domestic consumer sentiment. Higher fuel costs have fed directly into inflation, and central banks that had hoped to look through the first oil shock have concluded they cannot look through a second. Multiple developed-market central banks raised interest rates during the quarter. The US Federal Reserve lifted its target range by 0.25% to 3.75–4.00% in September, its first increase since 2023, and signalled another before year end. The European Central Bank and the Bank of Japan also tightened. At home, the Reserve Bank raised the cash rate for the fourth time this year, to 4.60%, the highest level since 2011.
By consequence, we have witnessed a sharp bond-market sell-off, with long-term government bond yields in Australia, the United States, the United Kingdom and Europe rising to multi-decade highs. Share markets proved surprisingly resilient against this backdrop. Both the ASX 200 and the S&P 500 set record highs in August before a modest retreat in September, but the quarter ended with the major indices little changed and US market domination once again narrowing to a handful of large technology companies.
Domestically, the economy is slowing but not stalling. GDP grew 0.4% in the June quarter and 2.1% over the year, a little firmer than the RBA had expected, although output per person was flat and households remain cautious. Unemployment has edged up to 4.7%, its highest level since late 2021, and house prices have now fallen for six consecutive months to be about 5% below their March peak, with Sydney values falling faster than during the 2022–23 correction. Consumer spending has so far held up better than sentiment, with retail sales up modestly over the year to July, but resurgent fuel costs and higher mortgage rates are expected to slow down spending. The tentative recovery in consumer confidence we noted in July has reversed. The ANZ-Roy Morgan measure fell to 67.1 following the September rate rise, one of the weakest readings since the series began in 1973, while household inflation expectations have climbed higher.
Investors are also contending with a slew of structural and regulatory changes. New legislation seeks to replace the 50% capital gains tax discount for individuals, trusts and partnerships with inflation indexation of the cost base, together with a 30% minimum tax on capital gains. Gains that accrue before the legislation commences retain the existing discount, but the reform changes the after-tax arithmetic of growth-oriented investing and has encouraged a shift in emphasis toward income and franked dividends.
Australian Shares
The Australian stock market, as measured by the S&P/ASX 200, finished the September quarter almost exactly where it started, closing at 8,789 points, a gain of just 0.1%. The flat headline masks a volatile quarter. After spending four months trading in a range between 8,500 and 9,000 points, the index broke higher in early August to reach 9,296, before September, historically the market’s weakest month, lived up to its reputation. Rising bond yields, the growing prospect of further rate increases and the ex-dividend seasonal effect led to a recent fall in stock market prices
Beneath the flat headline, the market has remained unusually polarised. Plenty of Australian stocks trade lower than our assessed fair value, but the index itself has been relatively high due to momentum driven rises in some heavyweight stocks, notably BHP and Rio Tinto this year, replicating the surge (that later retraced) exhibited by CBA in 2024/25. Certainly, we have rarely seen such a valuation gap between the largest stocks and the rest of the market.
The premium in the major miners is partly due to the price of copper, which is back near its record of about US$6.60 a pound, benefitting from a surge in demand from electrification systems, energy turbines and data centre construction.
The banks, which make up almost a quarter of the stock market index and lend about two-thirds of their books against housing, are facing a period of constrained growth that has tempered their collective share price performance. Loan and credit applications at the majors have fallen recently and home-loan growth is expected to slow further as higher rates, weak consumer confidence and investor tax changes take effect. Falling house prices need not mean falling bank shares because we don’t expect profits and dividends to decline, but with unemployment rising, current prices leave little margin for error
The August reporting season was better than many feared. Earnings came in slightly ahead of expectations and, more tellingly, dividends surprised to the upside: indeed, total dividends declared by ASX 200 companies rose about 10% when compared to the prior corresponding period. Excluding mining and energy, however, profit growth was not much higher than the rate of inflation. Share-price reactions were extreme, with almost half of ASX 200 companies moving by more than 5% on results day. A market that rewards and punishes so violently on a single announcement is one in which sentiment, rather than fundamentals, is doing much of the work. The weaker market has also drawn takeover interest, with Brookfield bidding for plumbing products maker Reliance Worldwide and EQT Infrastructure for waste manager Cleanaway.
Within the market, energy producers were again beneficiaries of the Middle East conflict, and gold miners enjoyed strong cash flows even as the bullion price stalled. Healthcare staged a notable recovery after a long run of downgrades: CSL and Cochlear merely met the reduced guidance they had issued earlier in the year, yet the relief was enough to lift CSL’s shares considerably after its result. Technology went the other way. Fears that artificial intelligence will commoditise software have weighed far more heavily on local names such as WiseTech and Xero than on comparable companies on other markets. The banks suffered a sharp sell-off in August as investors weighed the effect of higher rates on housing and credit quality, while property trusts and consumer discretionary stocks lagged.
Commodity markets were mixed. Copper rose about 10% to near record highs, helped by tariff-related trade distortions and production problems at some major mines. Iron ore came under pressure as seasonally weaker Chinese construction, poor steel margins and rising seaborne supply, including from the new Simandou project in Guinea, weighed on prices; it struggled to hold above US$100 a tonne and has since slipped to around US$91. Spot LNG prices are running at roughly double oil-linked contract prices, a meaningful benefit for Woodside and Santos, which sell part of their output on the spot market. Gold, which fell sharply as the war premium unwound last quarter, recovered to about US$4,400 an ounce by late August before rising bond yields and a firmer US dollar took it back to about US$4,200, broadly where it began the quarter. Notably, gold has not acted as a safe haven during this latest escalation, a reminder that when interest rates are rising, the opportunity cost of holding a non-yielding asset weighs heavily.
The market’s average dividend yield of about 3.5% now compares unfavourably with government bond yields above 5%, which is a meaningful headwind for share valuations, particularly for the most highly priced stocks. With the RBA openly contemplating a fifth interest rate increase and earnings growth outside resources subdued, we expect the index to remain volatile and broadly range-bound.
Yet the market is not uniformly expensive. Outside the largest miners and banks, some valuations have fallen such that we see better value among quality energy producers, defensive healthcare names such as ResMed and Sonic Healthcare, property trusts and others. We remain patient, selective buyers.
International Shares
Global share markets made modest progress in the September quarter, with global equities returning roughly 1.5% after the 13% surge of the June quarter. In the United States, the S&P 500 rose 2.0% and the Nasdaq 2.5%, both setting record highs in August and early September, while the Dow Jones Industrial Average fell 2.7%. Energy was the strongest US sector, with utilities, industrials and real estate the weakest.
The market trend path was far from smooth. July brought a temporary abrupt unwinding of the artificial intelligence trade alongside the collapse of the ceasefire, before investors returned to technology stocks in August on the strength of another excellent earnings season. US corporate profits continue to impress, with analysts expecting September-quarter earnings for the S&P 500 to grow meaningfully year-on-year. But the advance has narrowed again, and by quarter end new 52-week lows were outnumbering new highs even as the major indices sat near records. That combination of narrow leadership, rich valuations and a US ten-year Treasury yield exceeding 5% is not one we find comfortable.
The Federal Reserve’s September increase was unanimous, and 16 of its 18 policymakers expect at least one further rise this year. Since then, however, the data has softened, with US employers adding just 29,000 jobs in September, and markets are now debating whether the Fed will follow through. With a new round of US trade tariffs announced during the quarter and the US mid-term elections on 3 November, the potential for policy-driven volatility over the remainder of the year is high.
Elsewhere, Europe was the notable laggard. European shares outside the UK fell about 2% as the region’s dependence on imported energy left it exposed to the oil shock, and the European Central Bank raised rates for the second time this year. Japan was among the stronger major markets despite the Bank of Japan lifting its policy rate to 1.25%, while China’s market advanced modestly on policy support and some improvement in manufacturing. Emerging markets overall were slightly negative, weighed down by higher global borrowing costs and energy prices.
The Australian dollar was relatively stable, rising from about US$0.69 at the end of June to above US$0.72 in early September before slipping back to around US$0.70 by quarter end as the US dollar firmed. The movement in the currency trims or improves returns from unhedged international investments. We continue to advocate a measured international allocation for diversification but would not add aggressively to US technology at current valuations.
Property Securities
The listed property sector endured a difficult quarter. The S&P/ASX 200 A-REIT index fell about 9% to finish near 1,545 points, having touched three-year lows in late September before a small relief rally on the final day of the quarter. The sector is now down about 15% since the start of the year
The cause is not hard to find. Property trusts are priced in large part against bond yields, and the rise in the ten-year yield from about 4.7% to above 5.3% over the quarter applied steady downward pressure on valuations. Higher finance costs are also weighing on earnings, precipitating downgrades across the sector following the August results. Conditions differ markedly by segment. Retail is the bright spot, with low vacancies and solid rent growth; office remains weak but is stabilising, with premium, well-located CBD buildings continuing to outperform; but residential development has weakened as higher rates and tax changes deter buyers, weighing on Stockland and Mirvac, although most of their income still comes from rent and management fees.
The residential market deserves particular attention, both in its own right and for what it means for the wider economy. National home values fell 1.1% in September, a sixth consecutive monthly decline, leaving them 5.2% below their March peak. The weakness is broad-based but most pronounced in Sydney, where prices are falling faster than during the 2022–23 correction. Two forces are at work. The first is interest rates: four increases this year have lifted mortgage repayments, reduced how much buyers can borrow, and the prospect of further rises is keeping many on the sidelines. The second is the change to investor tax settings in the May Budget, including the capital gains tax changes taking effect from July 2027, which has dampened investor demand in particular.
The lending data points to further softness as housing credit growth has slowed, as have home loan applications. We expect lending to drop considerably for a relatively short cycle, before recovering when the RBA pauses its rate cycle, remembering there is still a favorable demand/supply imbalance. New house construction is also lagging approvals as builders and buyers wait for greater certainty, a headwind for developers and building-materials companies. We expect values to ease further while the RBA remains in tightening mode, although a disorderly decline appears unlikely while unemployment remains below 5% and there is no broad oversupply of housing.
For clients holding direct residential investment property, the combination of falling values, higher borrowing costs and the coming tax changes warrants a fresh look at gearing levels and expected after-tax returns. Listed property, by contrast, has already absorbed much of the bad news in its prices and offers liquidity and diversification that a single investment property cannot.
For income-oriented investors, the value case has strengthened rather than weakened. Real estate is now one of the better value sectors on the stock market with many REITs screening as undervalued, some of which still trade at steep discounts to their net tangible assets. Dexus and GPT Group, whose high-grade office portfolios have maintained occupancy well above the CBD average, are cases in point; GPT’s securities trade well below its June net tangible assets of $5.61. Distribution yields from quality diversified names are comfortably above 5%. The important caveat remains: the sector will stay acutely sensitive to bond yields, and a meaningful recovery is unlikely until inflation is under control, and the RBA can contemplate easing. We would accumulate gradually, favouring REITs with conservative gearing, long lease profiles and high-quality assets.
Interest Rates
After holding the cash rate at 4.35% in August, the Reserve Bank raised it by 0.25% to 4.60% on 29 September, a unanimous decision and the fourth increase this year. The Board observed that some of the upside risks to inflation it had flagged in August were materialising, pointing to further disruptions to global oil supply and to growth, inflation and government spending that had been higher than expected, and it stated that it would raise rates further if needed.
The minutes of the meeting, released in mid-October, were decidedly hawkish. The Board judged that it would be costly to wait for further evidence of building inflation pressure and suggested that a higher global ‘neutral’ interest rate may mean a 4.35% cash rate was less restrictive than it would have been two years ago. In plainer language, the RBA is not yet confident that it has done enough
Headline inflation rose to 4.0% in the year to August, up from 3.5% in July, with fuel prices doing much of the damage, while the trimmed mean measure held at 3.6% for a third consecutive month, still well above the 2–3% target band. The September-quarter CPI, due on 28 October, will be pivotal. Economists and banks are evenly divided on whether a fifth increase follows at the 3 November meeting, which would take the cash rate to 4.85%, its highest level since 2008, and futures markets currently imply a peak near 4.9% in 2027. Unemployment, at 4.7%, is up from 4.2% a year ago, but the RBA still describes the labour market as a little tight.
Long bond yields have risen sharply. The Australian ten-year yield climbed from about 4.7% at the end of June to a peak above 5.4%, the highest since 2011, before closing the quarter at around 5.3%, while shorter-dated yields moved above 5%. For borrowers this is unwelcome news. For savers and income investors, it is the best opportunity in more than a decade to secure attractive returns with minimal risk.
Our guidance therefore shifts a little. Term deposits, big-bank debt securities and government bonds now offer yields that compete more favourably with the long-run expected return from shares, and investors with income needs can meet them without venturing far along the risk spectrum. We would consider extending the term of a portion of fixed interest holdings to lock in current rates, while retaining some flexibility should rates rise further. As ever, when an interest rate on offer seems too good to be true, it probably is.
Outlook
Three months ago, we counselled a cautiously constructive stance and warned that the geopolitical calm underpinning the rally was barely a month old. That caution proved warranted. The ceasefire did not hold, oil prices have surged again, and central banks have responded by raising interest rates rather than cutting them. Yet share markets have so far absorbed these shocks reasonably well, a testament to strong corporate earnings, but also a sign that markets may be underestimating the risks.
The coming weeks are crowded with potential catalysts: the September-quarter CPI and the Federal Reserve’s next decision on 28 October, the RBA meeting and the US mid-term elections on 3 November, and any progress, or further deterioration, in the Middle East.
In this environment we favour balance over bravado. Interest-bearing investments now offer genuinely attractive yields and deserve a larger role in most portfolios. Property trusts offer improved value for patient income investors. In shares, the picture is more nuanced than the flat index suggests: the largest miners and banks look fully priced, but a broad range of quality companies further down the market now trade at attractive discounts. We would remain invested but selective, though a modest cash reserve remains sensible, not in expectation of calamity, but to take advantage of the opportunities that volatility will inevitably present.
The September quarter has been a reminder that geopolitics and inflation can return as quickly as they recede. Those who have maintained diversified portfolios, avoided excessive risk and kept sight of their long-term objectives have weathered these shifts well. We see no reason to change that approach.
Yours sincerely,
Malcolm Palmer
Joseph Palmer & Sons
This publication has been prepared by Joseph Palmer & Sons (ABN 29 548 490 818) an Australian Financial Services Licensee (AFSL 247067). Whilst the information contained in this publication has been prepared with all reasonable care from sources, which Joseph Palmer & Sons believes are reliable, no responsibility or liability is accepted by Joseph Palmer & Sons for any errors or omissions, or misstatements however caused. Any opinions, forecasts or recommendations reflects the judgment and assumptions of Joseph Palmer & Sons as at the date of publication and may change without notice. Joseph Palmer & Sons, their officers, agents, and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law. This publication is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Any securities recommendation contained in this publication is unsolicited general information only. Joseph Palmer & Sons are not aware that any recipient intends to rely on this publication and are not aware of the manner in which a recipient intends to use it. In preparing our information, it is not possible to take into consideration the investment objectives, financial situation, or particular needs of any individual recipient. Investors must obtain individual financial advice from their investment advisor to determine whether recommendations contained in this publication are appropriate to their personal investment objectives, financial situation or particular needs before acting on any such recommendations.
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