What’s Really Going On in Financial Markets as We Move Into 2026

Written by Wayne Terry

If you’ve been paying attention to financial news recently, it probably feels like a lot is happening at once. Headlines are jumping between interest rates, artificial intelligence, global politics and warnings from high-profile investors. It can be difficult to know what actually matters, and what’s just noise.

In this update, I want to step back and explain what’s really driving markets at the moment, how Australia fits into the global picture, and what this means for investors as we move through 2026.

As always, this isn’t about predicting the future. It’s about understanding the environment we’re investing in. Which is why we structure all of our clients portfolios in a way that protects their accumulated wealth, whilst ensuring its longevity throughout their retirement.

 Interest rates in Australia: why the RBA moved

Last week, the Reserve Bank of Australia (RBA) increased the cash rate. For some people, this came as a surprise. For others, it felt more like a reminder that the inflation story isn’t quite finished yet.

If you read the RBA’s own commentary, the reasoning becomes clearer. Put simply, inflation is proving more persistent than expected, particularly in services and housing-related costs. At the same time, the Australian economy has remained more resilient than many had forecast. Employment has stayed strong, household spending hasn’t collapsed, and parts of the economy continue to operate close to capacity.

From the RBA’s perspective, this combination creates a risk that inflation could remain above their target range of 2 – 3% for longer than is comfortable. So, the rate increase wasn’t about slamming the brakes on the economy, It was about reinforcing their commitment to price stability and signalling that they’re prepared to act if inflation pressures don’t ease as expected.

Importantly, the RBA was careful not to lock itself into a predetermined path. Future decisions will depend on how inflation, wages and economic activity evolve from here. In other words, this was a risk-management decision, not a declaration that rates must keep rising.

What I will say is that for investors and mortgage holders alike, unfortunately interest rates are unlikely to return to the low levels we saw in the decade before COVID – and I certainly wouldn’t expect the ultra low levels we saw immediately afterward either.

This doesn’t mean the outlook is bleak, but it does mean the investment environment has changed.

A more complex global environment

Globally, uncertainty has increased. Geopolitical tensions, trade disputes and political division — particularly in the United States — have all contributed to a sense that the world economy is becoming more complicated.

Some well-known investors, including Ray Dalio, have framed this as a period of major structural change. While the language can sound dramatic, the underlying idea is fairly straightforward: the global system is less stable and less predictable than it was during long periods of calm globalisation.

That doesn’t mean markets can’t grow or function. History tells us they can, and they do. It does mean, however, that volatility is likely to remain a feature rather than an exception.

It’s also worth remembering that even among the world’s most successful investors, there is no single agreed interpretation of what comes next. While some focus heavily on cycles, risks and structural change, others — like Warren Buffett — continue to emphasise owning productive businesses, focusing on cash flows, and ignoring short-term noise. In fact, this investment approach features in the client portfolios we build for clients.

Anyway, the fact that both approaches can coexist is a useful reminder of why diversification matters, and why structuring your portfolio correctly is so important.

Artificial intelligence: investment first, benefits later

One of the most talked-about forces in markets right now is artificial intelligence. Share prices, headlines and forecasts often give the impression that AI is already transforming the economy in a broad and immediate way. The reality is a little more nuanced.

What we are seeing is a massive surge in investment – we’re talking trillions of dollars here! Companies are spending this money on data centres, specialised chips, energy infrastructure and related technology. From an economic standpoint, this level of capital spending is significant enough to support economic growth. However, this is not the same thing as widespread productivity gains.

You see, these investments are highly capital-intensive but they don’t create large numbers of jobs, and the benefits tend to be concentrated among a small group of companies. As a result, economic growth can look strong, while many households and businesses don’t feel the same.

History suggests that truly transformative technologies often follow this pattern. Large upfront investment comes first, while productivity benefits take much longer to flow through the broader economy.

For investors, AI represents both opportunity and risk. It supports growth in certain areas, but it also increases concentration and raises the danger of expectations running ahead of reality, so we need to ‘right size’ our exposure to this.

How portfolios are being positioned

By now you should be starting to understand that a disciplined, diversified approach is particularly important, especially in the portfolios of the demographic we serve (pre and post retirees).

Rather than making big directional bets, the focus remains on valuation discipline, diversification across asset classes, and careful management of interest rate sensitivity. This approach acknowledges that markets can continue to deliver returns, while also recognising that volatility and setbacks are part of the journey.

In other words, portfolios are being built to cope with a range of possible outcomes, not just the most optimistic or pessimistic scenarios.

With the investment environment in 2026 being less certain, research and portfolio guidance from financial market specialists is becoming increasingly important - to that extent, we will be interviewing the portfolio manager from Lonsec next week, so keep an eye out for that.

So where does this leave investors?

Interest rates are higher because inflation has proven persistent, not because the economy is on the brink of collapse, and while global uncertainty has increased, let face it, uncertainty has always been part of investing.

The key lesson is not to react to headlines, but to remain focused on long-term objectives, diversification and sensible risk management. Markets will continue to move through cycles, but well-constructed portfolios are designed with that reality in mind, which is why we structure portfolios in the way we do.

As always, if you’d like to talk through how these themes apply to your own situation, or how your portfolio is positioned in this environment, I encourage you to get in touch.

Until next time, all the best.

Wayne