The US economy and, more specifically, earnings growth, entered the conflict on a strong and improving trend. While central banks have pivoted from “next move is down” to “next move is up” the earnings backdrop has been very strong and has so far overwhelmed the more hawkish rate backdrop. The temptation would be to argue that the AI theme is the key driver and that market performance has become even more concentrated and potentially fragile. However, the broader market is participating in the earnings recovery. While some of this growth will be a flow-on effect to manufacturing orders and capex related to the AI-thematic, EPS growth outside the Mag-7 was more than 15 per cent in Q1. Concentration has been even greater in EM, where three stocks have accounted for more than 60 per cent of the gain in EM year to date. Outside Korea and Taiwan, the major markets of China and India have dragged in terms of earnings and returns.

 

Australia's economy loses momentum. GDP grew just 0.3% in the March quarter, down sharply from 0.9% the prior quarter, as RBA rate rises and cyclone disruptions to mining and exports took their toll. Annual growth held at 2.5%, but the RBA is forecasting a further slowdown to 1.9% over the year to June. Australian equities remain well down the rankings and while the resources sector is attractive, the overall market is not. It would take a pivot from the RBA towards easing for us to be comfortable adding to broad Australian equity exposure. Nevertheless, we would not expect Australian equities to underperform as much as they have over the past year. The domestic growth outlook is more vulnerable and productivity remains a problem.

 

Global and Australian share markets have likely seen the worst from the war and oil shock if the flow of oil quickly resumes but the risk of further falls taking us to a 15% top to bottom correction remains high given uncertainty around the flow of ships through the Strait along with still stretched valuations, political uncertainty associated with Trump & the midterm elections and worries about private credit and the impact of AI. However, returns should still be positive for the year as a whole thanks to Trump still likely to pivot to consumer-friendly policies and solid profit growth.

 

Bonds are likely to provide returns below running yield this year. Cash and bank deposits are expected to provide returns around 4.25%.

 

Unlisted commercial property returns are likely to be solid helped by strong demand for industrial property associated with data centres.

 

Sydney and Melbourne house prices heading lower. NAB forecasts Sydney to fall 6% and Melbourne 7% in 2026, with the national market off 2%.