Markets moved through a defining week as three storylines, a fragile Middle East de-escalation, a softer US labour market and a renewed wobble in the AI trade, reset expectations for the second half of 2026. It also closes a financial year that, in hindsight, was almost entirely about momentum and about being on the right side of the AI trade.

Oil and the Middle East. 

The clearest signal came from the oil market. Hopes that peace talks between the US and Iran will resume drove WTI crude below US$70 and briefly below US$68.40 a barrel, with Brent close to US$71. What surprised many, including several sell-side desks and The Economist, was not that oil fell but how quickly. The futures curve, so often dismissed by traders as a poor forecaster, was in fact "bang on": supply was found. China materially cut imports and drew on reserves that turned out to be larger than the market credited, and the global economy proved resilient. A softer oil price flowed quickly through to headline inflation and helped ease European CPI to 2.8 % in June, down from 3.2 %. Advisers may wish to note that the market is now assuming, perhaps optimistically, that supply constraints have peaked.

A softer US labour market. 

US non-farm payrolls rose just 57,000 in June, well below the 115,000 consensus, and the prior two months were revised down by around 74,000 in total. The unemployment rate did tick lower to 4.2%, but a fall in participation muddies that picture. Wage growth of 3.5% is close to what the Fed can live with. Markets pushed out the timing of any Fed rate hike, and front-end US yields fell four to five basis points. Even so, new Fed Chair Kevin Warsh, speaking at the ECB’s Sintra forum, remains resolutely focused on inflation and has been clear he  will offer little forward guidance.

The RBA holds the line. 

The RBA’s minutes described financial conditions as "somewhat restrictive" but reaffirmed that rates need to stay that way. Cotality’s June data showed Sydney home values down 1.2% for the month, Melbourne down 1.0 % and Canberra down 1.3%, with only Perth (+0.2%) and Brisbane resisting the trend. Over three months Sydney and Melbourne are each down around 3 %. It is a genuine loss of momentum, though from strong starting points, and it flows through to household confidence and credit demand with a lag.

AI, early signs of rotation? 

US chip stocks were roughed up mid-week, with the Philadelphia Semiconductor Index down about 6% in a single session on reports that Anthropic is exploring making its own chips through Samsung. Nvidia and Broadcom each fell 2 to 3 %, Tesla fell 8 %, while Apple bucked the trend and rose 4.4 %. In thin holiday-week trade, ex-US small caps and Europe rose around 3 % while the NASDAQ drifted lower. The NASDAQ has gone sideways for around six weeks, the first hint of a change in leadership after a year dominated by a handful of names.

FY25/26 in one line

Being on the AI train mattered more than almost anything else. In round numbers, Korea was up around 100 %, Japan around 50 %, the NASDAQ around 30 % and Europe around 20 %. Australian equities went essentially nowhere — flat on price, and only a few % once you add dividends. For clients overweight the local market, that is a very large attribution gap to explain. It also drove a persistent gap of the order of 2 % between passive multi-asset strategies (which rode momentum) and active multi-asset strategies (which leaned on fundamentals). In risk-adjusted terms, more or less everything sat on the same upward-sloping line, the more risk you took, the more you were paid.

Where is the upside from here? 

Applying our valuation-dashboard methodology — cash flows, growth and price — to funds and baskets of stocks throws up some clear signals. Objectively, expected returns from Australian banks look like low single digits, and Australian equities in aggregate do not look like the place the highest prospective returns sit. Pockets of value are more interesting: some "fallen angel" franchise names trade on low multiples and could re-rate on any growth; parts of the small-cap universe screen well; and selected emerging-market baskets and franchise stocks are showing high double-digit prospective returns, which is highly unusual and does warrant attention.

Bubble, or productivity revolution "in our time"? 

We are not on the fence for the sake of it, we genuinely do not know. This week's conversation with the Munro Partners team was a useful counterweight: strong believers in the growth-year thematics, but with a hard 20 % stop-loss discipline that forces them to re-examine every position that breaks. Their view on where an active manager's edge lies is interesting: not in synthesising the current knowledge base (AI does that well) but in "imagination", the ability to think around corners, into the "what then". For clients with long time-horizons, staying invested through the noise remains the dominant strategy. For clients approaching or in retirement, the lost-decade tail risk is worth thinking about at least, especially if there is the opportunity to diversify into other equally prospective areas that arguably carry less sequencing  risk.

Key takeaways:

First, the oil relief is real but incomplete. Second, the Fed is less trigger-happy but Warsh has not ruled anything out. Third, no one really knows whether AI is a bubble or a productivity revolution in our time but there are other baskets with quite prospective eggs. Diversification is doing its job.