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In his mid-year outlook, Macquarie's Chief Economist Ric Deverell discusses the resilience of the global economy in the first half of the year despite the Middle East conflict. Growth in Australia will likely remain subdued for much of 2026 as the impact of interest rate increases and the Budget weigh on the housing market. A rebound, however, is expected into 2027.
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In addition to the economic outlook, we are pleased to share a report from the Macquarie Wealth Management Investment Strategy Team with their views on the road ahead for investors.
The AI juggernaut
The AI trade is broadening, but its foundation has been built by a relatively small number of US mega stocks that are driving the entire market. Broadening use of the technology creates competition amongst its suppliers and users and that can undermine earnings if companies do not adapt. We have always said there will be winners and losers out of the evolution, and the challenge for investors is to identify them early. Investors should ride the boom either directly or indirectly but have signposts that indicate when to use the offramp.
Growth looks positive beyond the oil speed bump
Economies such as Australia, Europe and Japan will take a larger hit to growth because they have limited spare capacity and their central banks have been forced to raise rates in response to the inflation threat. For example, in Australia the RBA’s three interest rate rises and change in tax policy are causing housing prices to fall in the Sydney and Melbourne housing markets.
In the economies where rates have risen, the economic impact is not only larger, but it will also have a longer duration. In contrast, in the US where rates have not risen, the oil shock has been absorbed much more easily. Provided the price of oil continues to retreat then the second half of the year could see growth pick up again, but this seems to be mostly priced by markets.
No clear path to lower inflation and rates
The global oil price shock has put central banks on edge, so a clean end to hostilities and the resumption of unobstructed free passage through the Strait of Hormuz is important. Global central banks remain on edge, with inflation above most of their targets and unlikely to ease significantly in the short-term.
Lower inflation and policy rates will take time and probably not emerge until the second half of 2027, at the earliest. Bond yields are therefore likely to remain relatively high, with structural support from global government spending, and investment in areas such as defence, clean energy increasingly absorbing global savings.
Even if productivity growth continues to increase in the US and assist in keeping a lid on inflation, we doubt it will ease upward pressure on bond yields. Historically, it tends to do the opposite because growth becomes more resilient to higher rates.
Risk assets are optimistic
US and Australian equity valuations are high, leaving them more exposed to bouts of volatility. Forward price-to-earnings (PE) ratios are well above average in both markets. But more concerning, PE ratios are high assuming very strong earnings growth over the next 12 months. If the AI capex fails to deliver a cash return, then the US market and global markets could see a sharp downturn. This doesn’t look likely in the short-term, but it is a longer-term concern. Earnings in Australia are expected to rise solidly (9% over the next 12 months), but interest rate rises and property tax changes are both working to slow the domestic economy making 9% earnings growth potentially difficult to achieve.
- Paul Huxford
Chief Investment Officer
Macquarie Wealth Management
| Asset class | Asset class comment | Preferences |
|---|---|---|
Cash (Australia) | It is likely that the RBA has finished tightening and the cash rates will remain high until the inflation battle has been won. Australian cash offers a solid risk-free return. | Maintain levels sufficient for transaction and liquidity purposes. |
Equities | Equities normally rally through slowdowns, and provided the oil shock is soon over, the outlook for risk assets is positive for the remainder of the year. The AI boom is growing and even though it is maturing we believe it still has further to go. EM has benefitted from the broadening of the AI boom and a weaker US dollar. Earnings in Japan and Europe are being upgraded. We are also relatively positive on the US, but performance depends on further upgrades to the earnings not a lift in valuation. The domestic economic outlook is problematic for Australian equities due to the three RBA cash rate increases this year and the tax changes to investment properties. It will take time for the RBA to be satisfied that it has inflation under control. The market is also expensive. | Markets: We favour overweight positions in Europe, Japan and emerging markets, neutral position in US and a large underweight to Australia. Size: Bias toward small cap over large cap stocks but acknowledge that a more attractive entry point is needed to have strong conviction. Style: We prefer ‘value’ over ‘growth’, given the slowdown in global economic activity appears to be temporary. Bond yields are likely to remain structurally relatively high making it more difficult for ‘growth’ to outperform. Expectations for IT earnings growth are already high and valuations stretched. |
Fixed Income | Higher all-in yields make fixed income an attractive longer-term allocation, offering both downside protection and a ballast to an overall portfolio. A barbell strategy that balances fixed rate, higher quality (mid-curve) assets against floating rate, senior secured, non-cyclical private credit remains a prudent approach. To navigate 2H26, investors should focus on three defining parameters: maintaining an up-in-quality credit bias, actively managing duration (progressively adding back Australia), and tiering of managers. | Sovereign: Our tilts have underweighted global sovereigns and maintained lower overall portfolio duration. There is a preference for mid-curve maturities versus the long end (particularly in the 20 to 30-year segment), which will be less sensitive to tariffs, fiscal issues, and term premia. Developed market government bonds will be shaped by central bank hawkish pivots, the pressure of massive issuance, and potential fiscal mismanagement. Investment Grade: Credit spreads remain at historically tight levels, making security selection critical but supported by healthy fundamentals. We remain constructive on investment grade all-in yields and positive demand/supply imbalances. Record issuance and the significant forecasted pipeline in AI-related high-grade issuance are currently not impacting market pricing as there is support through existing low balance-sheet debt. Market pricing will ultimately depend heavily on future supply dynamics and benchmark concentrations. We have a bias towards Australian credit, where yields are near 15-year highs. High yield is supported by higher carry, lower breakevens, and a pro-growth backdrop, but it is much more susceptible to risk-off events. We note that fundamentals are starting to show some erosion from Q1 earnings reports. We prefer senior secured, non-cyclical private credit for its illiquidity premium and superior protections through covenants and documentation. Leveraged loan positioning should remain cautious relative to high yield bonds, as loans remain vulnerable to documentation risks, PIK toggles, and tech-adjacent revaluation shocks. Expect more dispersion between sectors. |
Private Credit | Dynamics are becoming more differentiated, with slower fundraising tightening liquidity at the margin. While headline fundamentals remain stable, dispersion is increasing across sectors and borrowers, with early signs of stress concentrated in more levered and cyclical exposures. Pricing is firming modestly, although competition persists in larger, sponsor-backed deals. | Focus on managers with strong origination, structuring and workout capabilities; avoid commoditised, large-cap direct lending where competition persists. Prioritise US middle-market and European direct lending, alongside asset-backed finance (ABF) for diversification and collateral-backed downside protection. |
Alternatives | Private Equity: The recovery in activity remains gradual, with constrained liquidity continuing to delay distributions and compress realised return dispersion. This is increasingly testing asset quality and execution, with outcomes likely to re‑diverge as exits recover. Return drivers are shifting toward operational value creation, with manager selection, underwriting and deployment discipline critical. Hedge funds: A more volatile macro backdrop and elevated cross‑asset dispersion are supportive of alpha generation. However, increasing crowding, leverage and positioning concentration, particularly in thematic exposures, point to a more nuanced balance between opportunity and vulnerability. | Private Equity: Focus on managers with operational expertise and the ability to control outcomes, favouring small‑to‑mid market buyouts, secondaries and recent vintages with clearer pathways to realisation and more attractive entry points. Hedge funds: Prefer diversified multi‑strategy and relative value approaches with disciplined risk frameworks, prioritising managers able to navigate crowding, adapt to shifting market regimes and dynamically allocate across opportunity sets. |
Real Assets | Real asset returns have historically displayed lower correlation with traditional asset classes, making them a useful addition to a portfolio, providing some downside protection and improving the consistency of returns over time. Infrastructure’s defensive characteristics and historically lower correlation with traditional asset classes can help reduce overall portfolio volatility Property continues to be in an upswing, with office recovering strongly, driven by a constrained supply backdrop given rising construction costs. | Infrastructure: Prefer core, unlisted, infrastructure due to less correlation to listed markets. Property: Prefer core unlisted diversified exposures. |
“The AI capex boom is gearing up and providing a timely offset to the loss of growth from the oil shock.”
Investment Strategist
Macquarie Wealth Management
“The Tech boom is not just purely a US phenomenon.”
Head of Equities and Real Assets
Macquarie Wealth Management
“The local economy, as well as housing, is under pressure from three rate hikes and a non-investor friendly budget means it is going to be hard yakka for Australian equities.”
Head of Equities and Real Assets
Macquarie Wealth Management
“In a market shaped by shifting policy and inflation fears, higher yields have re-established fixed income as an attractive portfolio ballast. Navigating this landscape requires strict selectivity, an up-in-quality credit bias, and active duration management.”
Head of Fixed Income
Macquarie Wealth Management
“Recent headlines have been a liquidity story rather than fundamental deterioration. Our message is to keep calm and carry on.”
Senior Investment Analyst, Alternatives
Macquarie Wealth Management
“Recent vintages, secondaries and small-to-mid market buyouts remain best positioned to take advantage of more attractive entry valuations and less competitive dynamics.”
Senior Investment Analyst, Alternatives
Macquarie Wealth Management
“Real assets can offer investors positive real returns, given inflation linked revenue – which is very attractive in this environment”
Head of Equities and Real Assets
Macquarie Wealth Management
We hope you found our insights valuable as we continue through the remainder of 2026 and beyond. If you would like to continue reading, you can access the full 2026 mid-year outlook.
This Report was finalised on 24 June 2026.
Recommendation definitions (Macquarie Australia/New Zealand): Outperform – return >10% in excess of benchmark return Neutral – return within 10% of benchmark return Underperform – return >10% below benchmark return.
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