- The Bull Case, Three Tailwinds Supporting Markets
- Disinflation Opens the Door to Rate Relief
- Materials and Commodity Demand Remain a Structural Theme
- Tech, AI and Earnings Momentum
- The Bear Case, Three Risks That Could Disrupt Returns
- China Growth and Tariff Fallout
- Regulatory and Fiscal Pressure Build
- Positioning for the Year Ahead
The ASX 200 enters 2026 hovering near record highs after a solid, if uneven, 2025. Gains were driven by international equities, gold and resilient cash returns, but stretched valuations and lingering policy uncertainty mean the year ahead demands a more balanced bull and bear framework. Recent market updates from AMP and ASX Investor Update point to a familiar pattern, materials and healthcare continue to outperform, while financials and utilities lag, with global interest rate dynamics remaining the critical swing factor.
For investors, the question is not whether upside exists, but whether tailwinds can overpower a growing list of macro and policy risks.
The Bull Case, Three Tailwinds Supporting Markets
Disinflation Opens the Door to Rate Relief
While inflation has proven stickier than many hoped, 2025 still marked a shift toward disinflation across major economies. Overseas central banks have already delivered partial easing, supported by resilient labour markets and slowing price growth. In Australia, economists expect the RBA to remain cautious, with NAB forecasting the cash rate peaking around 4.1% by mid 2026 from roughly 3.6% today.
If disinflation trends continue to cap further tightening, risk assets stand to benefit. Business surveys already point to a modest improvement in domestic growth momentum, which would support earnings stability even if rate cuts arrive later rather than sooner.
Materials and Commodity Demand Remain a Structural Theme
Investor rotations into energy and materials through 2025 reflect more than short term sentiment. US infrastructure spending, electrification investment and supply chain reshoring are underpinning demand, particularly for copper, iron ore and energy inputs. Trading data from nabtrade shows elevated cash balances waiting for pullbacks, with selective buying in quality resource names after periods of volatility.
Strong US earnings growth through much of 2025 has also provided a positive spillover, reinforcing confidence in cyclical exposure tied to global industrial activity.
Tech, AI and Earnings Momentum
Despite growing scrutiny around valuations, broader economic resilience continues to support corporate earnings. Productivity improvements, including a sharp lift in US output growth during parts of 2025, have helped contain labour costs and preserve margins. For ASX investors, this has flowed through to locally listed technology, infrastructure and data related names with credible cash flow pathways.
AI related capital expenditure remains a powerful theme, even as markets become more selective. The focus is shifting away from speculative narratives toward businesses that can convert investment into earnings.
The Bear Case, Three Risks That Could Disrupt Returns
Higher for Longer Rates Bite Valuations
The RBA’s emphasis on near term inflation risks, particularly housing and rents, keeps the door open to further tightening if inflation surprises to the upside. AMP expects Australian equities to deliver mid single digit to high single digit returns over time, but warns that 10% to 15% corrections are plausible given stretched valuations and political uncertainty. With equity risk premia already compressed, any renewed bond yield pressure could quickly challenge current market multiples.
China Growth and Tariff Fallout
Trade tensions resurfaced sharply in 2025, with tariff announcements triggering volatility despite subsequent recoveries. Ongoing uncertainty around China’s growth outlook, combined with softer global freight and consumer indicators, poses a risk for export exposed sectors. Given the ASX’s heavy weighting toward materials, any prolonged slowdown in Chinese demand would be felt quickly.
Regulatory and Fiscal Pressure Build
Structural fiscal pressures are rising in Australia as the population ages, echoing global concerns around persistent budget deficits. At the same time, tighter merger rules, banking regulation and macroprudential controls are dampening housing momentum and corporate activity. With mega cap US tech dominating global indices, sentiment shifts offshore could also spill into local markets with little warning.
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Positioning for the Year Ahead
Taken together, 2026 shapes as a year of moderate returns and elevated volatility rather than a clean continuation of the 2025 rally. Portfolio flows suggest investors favour selective exposure to materials and healthcare, alongside holding cash for opportunistic entry points. Gold and alternative assets continue to attract interest as hedges against fiscal and geopolitical risk, while a firmer Australian dollar supports import sensitive businesses.
Returns closer to 8% appear achievable, but patience and discipline are likely to be rewarded more than chasing momentum in a market still climbing a wall of worry.