Sunbird Market Update and Outlook – Market Update – May 2026
Summary: The March quarter saw increased volatility driven by rising interest rates, geopolitical tensions in the Middle East, and pressure across growth assets. Markets remain cautious with inflation risks and energy supply constraints shaping the outlook.
Global Wrap
Global markets continued to rally in May, as technology stocks rebounded and Brent oil fell 19% on hopes that the Iran war would soon be resolved. The US economy seems robust, despite higher tariffs and fuel prices. The US Federal Reserve (the Fed) has provided support by remaining on hold at ~3.7% even though US inflation is running well above the Fed’s 2.0% target.
Recently, US payrolls were stronger than expected and that has increased the pressure on the Fed to hike interest rates. Indeed, US bond yields have been rising with the 10-year bond yield currently trading around 4.6%. New Fed Chair, Kevin Warsh, will find it hard to remain on hold, particularly if fuel prices remain elevated.
The Iran war has entered its fourth month with a ceasefire proving elusive. The longer the Strait of Hormuz remains restricted the greater the threat that higher energy prices will seep into core inflation, forcing central banks to increase interest rates. Japan and Australia are already well down the path of tightening monetary policy.
Commodities generally remain buoyant as it has become clear that higher fuel prices and the AI capex theme (data centres) are likely to turbo charge the move to electrification. Key commodities required for the energy transition such as copper, aluminium, rare earths and lithium have led the charge.
Technology stocks have rebounded to record levels since the March 2026 low and a suite of mega-cap IPOs are ahead including SpaceX, Anthropic and OpenAI. These companies offer strong revenue growth but little in the way of tangible earnings. It will be interesting to see if these floats will mark the rise of a new frontier or a short-term bubble in the technology sector. Only time will tell…
Australian Wrap
The big news in May was the Federal Budget which made a number of changes to tax rules around negative gearing, CGT and discretionary trusts. While the changes were implemented under the guise of improving housing affordability, they will apply to all assets and will generally increase the tax take of the government. The general market view is that the Budget represented a tightening in fiscal policy, which coupled with tightening monetary policy is highly likely to slow the economy and the housing market.
Inflation continues to run above target (headline 4.2%, core 3.4%) but is a little below the RBA’s forecast, leading to the market pricing in only one more rate hike. Any resolution to the Iran war would be a major positive in terms of reducing inflationary pressure from higher fuel prices. To date, Australia has managed to maintain its supply of petrol and diesel, while fuel prices have been eased by a 50% reduction in fuel excise, although this is expected to end on 30 June 2026.
Commodities were mixed over the month with oil and gold prices retreating, while most other metals remained buoyant. An inflationary environment is generally positive for commodities and the resources sector.
The Australian share market rebounded in May but is generally underperforming global markets due to the productivity and inflation challenges the economy faces. The Resource sector remains buoyant but most other sectors face low growth and higher costs. The May Budget, once again, avoided any real initiatives to address productivity.
It seems the Australian economy is highly likely to slow in the short term due to tightening fiscal and monetary policy and a housing slowdown. We wouldn’t be surprised to see economic growth slow sharply, which may reduce the need for any further rate hikes. Inflation should eventually retreat but much depends on how long fuel prices remain elevated.
Outlook
The outlook has become quite challenging due to several mixed signals. There are the positives of expansionary US policy and the technology theme against the threat of rising inflation and interest rates. Meanwhile, the Australian economy seems to be facing a few headwinds in terms of tightening fiscal and monetary policy and higher fuel costs, but the commodity outlook remains positive.
We currently expect a ‘muddle through’ scenario of low-to-moderate growth, moderate inflation and moderate interest rates, with the outlook likely to be heavily influenced by how long oil and gas flow through the Strait of Hormuz remains restricted. The longer that fuel prices remain elevated the greater the chance that fuel inflation seeps into core inflation, forcing central banks to lift interest rates.
Key Known Risks
- Persian Gulf oil and gas flows remain restricted1
- Inflation remaining above target
- 3Rising interest rates in response to rising inflation and budget deficits
- The AI investment boom fails to earn a decent return on investment
- Leverage in the private equity/debt space comes undone; and
- Geopolitics and/or climate change events impact financial markets
Next Key Events
- RBA meeting – 16/17 June 2026
- Fed meeting – 16/17 June 2026
About the Author
Bill Keenan
Founder & Portfolio Manager, Sunbird Portfolios
Over 30 years’ experience in financial markets.
Disclaimer & Warning
This material is provided by Sunbird Portfolios Pty Ltd and is general in nature only. It does not take into account your personal objectives, financial situation or needs. Past performance is not a reliable indicator of future performance.