Investments

28 October 2026

The global economy is still expanding, but persistent inflation, higher cost of debt and valuations based on continued earnings growth are resulting in an increasingly challenged outlook across regions and asset classes.

By Alexandra Campbell, Chief Investment Officer, JBWere & NAB Private Wealth

Global markets are entering a more complicated phase. In the world’s largest economy, economic activity and company earnings remain strong, but persistent inflation risks more restrictive monetary policy. Growth may remain healthy for a time even as the foundations for a slowdown are laid. Economic conditions in “rest of the world” developed economies are less robust, with key social and economic challenges across Europe and the UK, as well as domestically.

A key uncertainty is timing. Rate increases affect housing, borrowing and employment before flowing through to demand and profits. The other key uncertainty is the sustainability of earnings growth required to support equity valuations, giving rise to nervous investors and volatile markets.

Growth remains firm, but inflation is not retreating quietly

US business surveys strengthened in the third quarter, while improving work backlogs and supplier delivery times pointed to firmer activity into year-end. The Atlanta Federal Reserve's GDPNow estimate peaked above 5 per cent in September before moderating to around 3.5 per cent.

That resilience has supported earnings, especially in technology, semiconductors and resources; but also, price pressure. Input costs are rising across services and manufacturing and selling prices have turned higher. Central banks may therefore struggle to declare victory even as inflation eases from its peak but remain stubbornly above the target range.

Expectations of only one or two further rate rises have faded, with markets instead pricing cycles of roughly four to seven increases across major developed economies, noting Australia is well into this cycle with four hikes since February 2026. Large fiscal deficits, geopolitical competition and heavier bond issuance to fund AI capex and government deficits are also keeping inflation and long-term borrowing costs elevated.

Australia is further along the adjustment

Australia is further advanced in its tightening cycle. Employment, housing and broader growth indicators have softened as higher rates take effect. Persistent inflation keeps the near-term policy debate alive, with the potential for a further rate hike next month, with the drag on activity expected to become clearer over coming quarters.

This creates a divergence with the United States, where growth and earnings are more resilient. Australian companies exposed to domestic demand face tougher conditions, with banks suffering from the slowdown in the property market, although resource companies remain more robust by being tied to global demand and supply.

Australian long-term government bond yields have risen sharply, while local equities look expensive relative to debt on a risk-adjusted basis. Investors can now earn more attractive yields from government bonds and institutional grade credit, while equity prices remain high relative to company earnings, highlighting how sharply the relative valuation of shares and bonds has shifted.

Equity strength is becoming more concentrated

US profit margins and earnings growth remain strong, supported by artificial-intelligence investment across technology and semiconductor supply chains. Key tech companies are reporting quarterly earnings in the coming weeks, which are expected to be robust. Korea and Taiwan are also beneficiaries, while Australia’s earnings outlook is softer and increasingly dependent on resources.

While equity valuations are near multi-decade highs based on historical earnings, they can be considered cheap if anticipated earnings growth is realised. This is not without risk, with equity markets becoming more concentrated and the allocations of private investors to global equities around previous bull-market extremes, while cash holdings are at multi-decade lows. Crowded positioning leaves less room for disappointment if earnings weaken or bond yields continue to rise.

Domestically focused industrial and financial companies are exposed to weaker Australian activity. Resources can remain supported while global demand is firm, but highly valued growth companies are more sensitive to long-term rates because more of their value depends on distant profits.

Credit markets face a test of valuation and liquidity

Corporate credit spreads remain narrow, offering investors only a modest premium over government bonds for taking company risk. However, spreads have begun to widen as growth slows, stress rises and issuance increases, including borrowing linked to large-scale artificial-intelligence investment.

Private credit faces scrutiny, including with respect to the valuation of unlisted loans, poor quality loan books and the gating of redemption requests. The issue is acute for semi-liquid funds, which offer periodic redemptions while holding assets that may take much longer to realise.

The Australian Securities and Investments Commission (ASIC) is focusing on governance, underwriting, conflicts, valuation, liquidity and disclosure. Funds with a high exposure to property are particularly exposed: higher interest and construction costs and a subdued residential outlook have squeezed developers, while domestic private-credit managers often hold substantial real-estate and development loans.

Recent audit and gating demonstrate the risk in private credit, and the need for a higher return compared to liquid credit. When asset values become uncertain, funds may restrict redemptions (“gate”) rather than sell illiquid loans at distressed prices or disadvantage remaining investors. This can protect a fund as a whole, but exposes the mismatch between product accessibility and underlying liquidity.

A cycle approaching a harder phase

Immediate global contraction is not the central case, although the risk differs between developed economies, with key differences between the US, European and UK economies and Australia. Firm activity and earnings still support markets, particularly in the US and sectors linked to technology and commodities. However, persistent inflation, rising rates, pressure on spreads, elevated valuations, crowded positioning and mounting credit and liquidity risks are making the cycle more fragile.

Australia offers an early view of the adjustment: its rate cycle is more advanced, domestic momentum is fading, and its earnings outlook is diverging from the US. Similar pressures are expected to emerge elsewhere with a lag, such as is becoming apparent in European economies. The next phase depends on whether inflation eases before borrowing costs inflict lasting damage on employment and profits.

To discover more call 1300 683 106 or email us on NAB Private Wealth Investor Desk

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Important information:

The information contained in this article is believed to be reliable as at October 2026 and is intended to be of general information only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial and taxation advice before acting on any information in this article. Any forecasts or views about future events are not guaranteed and may change. Past performance is not a reliable indicator of future performance. The views expressed are those of the author and are current as at the date of publication.

© 2026 National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. NAB Private Wealth is a division of National Australia Bank Limited.

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