1. Sticky inflation
While Australian shares recorded positive returns in 2025, the benchmark S&P/ASX 200 is down more than 4% from its record high, struck on 21 October, to close the year at 8714.3 points.
The selldown coincided with a changing outlook on inflation, whereby traders swapped their forecasts of further rate cuts for probable hikes. Interest rate rises are generally viewed as a drag on stocks, given they make funding more expensive for businesses, and weigh on consumer spending.
Two of the four big banks expect a rate increase at the first Reserve Bank of Australia meeting of the year, in early February, while none are forecasting additional rate cuts.
The rate outlook partly explains the recent divergence in performance between the ASX and Wall Street, with the US market recording strong double-digit returns backed by a December rate cut and the possibility of more to come.
Wall Street’s strong performance has also been fuelled by an AI run by the country’s big technology stocks, which differs from Australia’s resources and banking-led market.
The chief economist at Betashares, David Bassanese, says the critical question for the Australian economy in 2026 is whether inflation can moderate without the need for more monetary restraint and slower growth.
2. Geopolitical risk
Most analysts expect the global and Australian equities markets to rise in 2026 despite the presence of geopolitical risks, including heightened tensions between Beijing and Taiwan and a US oil blockade of Venezuela.
Traders tend to overlook geopolitical risks until they disrupt physical supply chains.
The potential of an AI bubble bursting and signs of global inflation reigniting did spark waves of volatility in 2025, although many investors used the sell-offs to top up their holdings.
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The challenge with bubbles is that, even if an investor knows one is forming, they often struggle to predict when it will actually burst.
Bassanese says the market still seems to be in the “early-to-mid stages of a potential bubble” as AI computing capacity outstrips supply.
UBS expects AI to fuel further gains in global equities although it warns investors to be “mindful of bubble risks”.
Meanwhile, the value of crypto assets, including bitcoin, have been sold down in recent months after being caught up by the growing fears around a market bubble.
Tony Sycamore, market analyst at IG Australia, expects the best-known crypto asset to turn lower in the new year, with a potential retest of its 2025 lows struck after Donald Trump’s “liberation day” tariff announcements in early April.
A fall in the value of bitcoin would be bad news for many younger Australians who increasingly view crypto as a means of supplementing their income to pay for high living costs, including housing.
Data from financial comparisons site Finder shows that young adults aged under 30 are the most prolific investors in crypto, with nearly one in four putting money into the asset class.
3. Silver and gold
Precious metals have been on a hot streak led by huge gains in silver and gold, as well as platinum and palladium.
CMC Markets analyst Luis Ruiz says that precious metals are traditional safe-haven assets, and their appeal tends to rise when uncertainty increases.
“The forces driving demand are deeply rooted and unlikely to fade quickly,” Ruiz says.
“New investors continue to enter the market, while existing holders have little reason to sell unless they need cash or find a more attractive alternative.”
The spectacular price rises – silver is up by more than 150% over the year and gold by about 70% in US dollar terms – means they have been susceptible to sharp corrections but both assets have rebounded after recent sell-offs.
Parts of the Australian share market are well placed to benefit from ongoing demand in precious metals, given the country’s rich gold deposits and silver production.
The downside is that the sharp increases in precious metal prices might prove to be a warning sign of economic trouble ahead.
