Insights

Volatility Is Becoming the Norm

July produced a mixed month for investors.

Australian shares finished higher and several developed markets performed well, but investors were also dealing with renewed geopolitical tensions, higher oil prices, uncertainty around interest rates and growing questions about the enormous sums being invested in artificial intelligence infrastructure.

The technology-heavy Nasdaq fell 3.1% during the month, while the broader S&P 500 finished relatively flat. By contrast, the UK market rose 3.5% and Australian shares gained 2.2%.

It was less a story of broad market weakness and more a shift in leadership as investors reassessed where the risks and opportunities might lie.

Technology comes under pressure

Artificial intelligence has been one of the strongest themes driving global markets, but some of that enthusiasm was tested in July.

Concerns that rising memory-chip prices could increase the cost of building and operating data centres weighed on semiconductor and AI infrastructure businesses.

Micron Technology fell around 29% during the month, while other chip-related companies also came under pressure as investors questioned the near-term returns from continued AI spending.

At the same time, other technology and services businesses performed strongly, showing that investors are becoming more selective rather than abandoning the theme altogether.

Oil prices add another complication

Geopolitical risk also returned to the foreground.

The ongoing conflict involving Iran contributed to Brent crude oil rising approximately 24% during July.

That matters beyond the energy sector. Higher oil prices increase costs for businesses and households and can make the job of central banks more difficult by adding another source of inflation.

Bond markets reflected those concerns, with the US 30-year government bond yield climbing to 5.18%, its highest level in almost twenty years.

Australia holds up relatively well

The Australian share market gained 2.26% in July, supported by softer inflation data, resilient company profits and a firmer Australian dollar.

The Reserve Bank of Australia left the cash rate unchanged at 4.35% for a second consecutive meeting following three increases earlier in the year.

However, underlying inflation edged up to 3.6%, still above the RBA's preferred 2% to 3% range.

Governor Michele Bullock continued to warn that inflation risks remain skewed to the upside, meaning further rate increases are still possible.

At the same time, tighter financial conditions are beginning to have an effect.

National home-price growth has slowed, investor mortgage applications have fallen sharply following recent tax changes, and business surveys suggest capacity pressures are easing.

Unemployment remained at 4.4%, although employment growth was stronger than expected.

A changing global picture

The US economy is also showing signs of cooling.

Payrolls fell by 23,000 in July, previous employment figures were revised lower and annual wage growth slowed to 3.2%.

That gives the Federal Reserve more flexibility on interest rates, although inflation and higher energy prices remain concerns.

Japan faces a different challenge.

Inflation pressures are becoming more visible, with a weaker yen, higher imported costs and a tight labour market increasing the likelihood that interest rates will need to move higher over time.

China, meanwhile, continues to grow, but momentum is slowing.

Advanced manufacturing, technology investment and exports remain supportive, while household spending and the property sector continue to weigh on the domestic economy.

A mixed Australian share market

Australia's positive headline return also concealed large differences between sectors.

Energy was the strongest performer, rising 12% as higher oil prices supported companies including Ampol and Woodside Energy.

Technology moved in the opposite direction, with the information technology sector falling 4.7%.

Materials companies were also under pressure as iron ore weakened on concerns about Chinese demand and gold prices fell alongside higher global bond yields.

Once again, the overall index only tells part of the story.

The longer view

Short-term returns varied widely in July.

Australian shares gained 2.26%, while international shares fell 0.92% and emerging market shares declined 4.39%.

Over the ten years to 31 July 2026, however, Australian shares returned 9.02% annually, emerging market shares returned 10.06% and international shares returned 13.72%.

Those longer-term returns include wars, inflation shocks, interest-rate cycles and repeated periods of sharp market volatility.

The honest read

Markets have become more comfortable looking through geopolitical uncertainty, but the outlook remains fragile.

Inflation is still too high for central banks to declare victory. Oil prices have risen sharply, bond yields remain elevated and investors are becoming more selective about where they are willing to pay high prices for future growth.

None of that necessarily points to an immediate downturn.

It does suggest that volatility is likely to remain part of the investment landscape through the remainder of 2026.

For investors, that reinforces the value of diversification, maintaining a long-term perspective and having a portfolio that does not depend on markets behaving predictably from month to month.

For the full July market update, including commentary on global markets and asset-class returns across one-month, three-month, six-month, one-year, three-year, five-year, seven-year and ten-year periods, click here to read the full update.