Economic Update: CY2026 Outlook – Late Cycle

The setup:

2025 surprised on the upside. We started cautious as PEs pushed fresh highs, but policy support, contained credit spreads, and AI momentum carried the tape longer than expected. Into CY26, the bull market isn’t done, yet it’s increasingly late‑cycle: earnings need to show up to keep valuations in check.

Macro & policy:

• Inflation re-accelerated in part due to tariffs; long yields stayed range‑bound, helped by the resumption of QE in the U.S., which caps long-dated yields.
• Policy risk is elevated: a dovish‑leaning Fed Chair arrives May 2026, and the U.S. mid‑terms (Nov 3) may restore checks and balances—our base case is that markets will welcome this outcome.

Markets:

• U.S. remains the dominant force, powered by fiscal and monetary support. AI is still a strong thematic, but proof of revenue will be crucial to sustain multiples.
• Australia is set for consolidation: modest EPS growth, some PE de‑rating from ~19–20x toward ~17.5x, and dividends (~3.3%) doing most of the heavy lifting on total returns.

Currency:

• Our earlier AUD call underestimated the impact of superannuation outflows to global markets. Even if U.S. rates fall faster than ours, super flows likely cap AUD upside at circa ~70c vs the ~75c implied by rate differentials.

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