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Rising oil prices set the tone for markets in July as renewed conflict between the United States and Iran cutvessel crossings through the Strait of Hormuz by about 95%. Energy shares gained strongly in Australia andoverseas, while Australian shares returned 2.1%, outperforming hedged international shares. Locally, inflationeased more than expected, although it remained above the RBA’s target range.
Australian shares returned 2.1% in July, outperforminghedged international shares, which gained 0.3%.Energy rose 11.6% as oil prices increased, whilefinancials gained 7.6% amid a rotation towardsdefensive shares and expectations that interest rateshad peaked. Information technology fell 3.7% onconcerns about AI related competition.Headline CPI declined 0.1% in June, against anexpected 0.2% rise, as cheaper petrol loweredtransport costs. Annual inflation eased to 3.8%, whiletrimmed mean inflation held at 3.6%; both remainedabove the RBA’s 2-3% target.Unemployment remained at 4.4% as employmentincreased by 76,300. House prices fell 0.7% over theJune quarter but remained 7.3% higher annually.Government bond yields rose, while the Australiandollar gained 1.4% to end July at US$0.70.
US-Iran hostilities escalated in July after Iran attackedshipping in the Strait of Hormuz and announced itsclosure, prompting retaliatory US strikes. Iransubsequently attacked several Gulf states, while bothcountries confirmed the ceasefire had ended.Hedged international shares gained 0.3%, masking a15.6 point gap between energy and informationtechnology. Energy rose 13.0% and financials gained4.7%, while information technology fell 2.6%.Emerging-market shares declined 4.4% unhedged, ashigher oil prices and weakness in Asian markets,particularly Korea, weighed on returns.The United States introduced tariffs of 10.0-12.5%across 60 trading partners and imposed a 50% tariffon approximately US$18 billion of Canadian goods.The Federal Reserve, European Central Bank andBank of England held rates, while the Reserve Bank ofNew Zealand raised its cash rate to 2.50%.
Markets remain focused on inflation, deficits, housing and geopolitics, but the clearest message from reportingseason is that investment, not macroeconomics, is driving growth. Companies globally continue to spend onAI, technology, infrastructure and industrial capacity, with this investment translating into stronger earningsthan expected.The recent US earnings season was among the strongest in years: 83% of S&P 500 companies beat profitexpectations, while median earnings grew by around 14% over the year. Importantly, strength broadened beyond asmall group of mega-cap technology companies. Software and semiconductors led, but industrials, healthcare,energy and financials also performed well. The sharpest divide was between companies benefiting from capitalspending and those more reliant on consumer demand.This trend extends beyond the US. Despite subdued economic headlines in Europe and China, infrastructurespending, industrial policy and supply-chain investment are supporting selected sectors. Australia is also provingmore resilient than headlines suggest, with employment, exports and business activity holding up as inflationbecomes less of a headwind.We remain constructive on equities, infrastructure, commodities and selected credit. Volatility may increase, but withinvestment and earnings supportive, market pullbacks are more likely to create opportunities than mark the end ofthe cycle.Charts of the month
- AI adoption trends. We watch enterprise adoption of AI and track demand relative to commissioned compute capacity.
- US inflation and the Fed. Whether moderating inflation allows policymakers to maintain credibility without derailing growth.
- Bond markets and term premia. Elevated long-term bond yields remain a key risk for asset valuations, despite stronger earnings growth outlooks.
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