Overview
The January 2026 market update describes a strong start to the year for global share markets, followed by rising volatility driven by shifting interest‑rate expectations, commodity price moves, and growing concern about the disruptive impact of artificial intelligence on the software sector. While equity markets delivered positive returns overall, sentiment became increasingly fragile as risk‑off behaviour emerged toward the end of the period.
Market Performance and Investor Sentiment
Australian and global equity markets recorded solid gains in January, extending the rally that began in 2025. However, this momentum weakened as investors grew cautious in early February. Sharp declines in precious metals prices, a strengthening Australian dollar, and renewed uncertainty around US monetary policy contributed to a broader risk‑off repricing across markets. Gold and silver both fell sharply from recent highs, signalling that market nerves extended beyond individual sectors.
AI Disruption and the Technology Sell‑Off
Concerns about large‑scale AI disruption became a major driver of market volatility. The release of advanced AI tools capable of automating complex professional tasks raised fears that traditional software business models could be undermined. This triggered heavy sell‑offs in software stocks globally, with both US and Australian technology companies experiencing significant share price declines. In contrast, semiconductor and hardware‑focused companies proved more resilient, highlighting a growing divergence within the technology sector.
United States Economic and Policy Backdrop
US economic data in January pointed to resilience, with stronger‑than‑expected employment figures reducing the urgency for near‑term interest rate cuts. Despite this, underlying labour market indicators suggested momentum remains soft. Inflation continued to cool modestly, with both headline and core measures easing and leading indicators pointing to further disinflation later in the year. Fiscal policy, however, remains highly supportive, with substantial tax rebates expected to flow into the economy, raising longer‑term concerns about deficits and a potential inflation rebound beyond 2026.
China’s Inflation and Growth Dynamics
China’s economy continues to be dampened by the ongoing property market downturn, creating a deflationary drag on growth. January data showed a sharp moderation in consumer inflation, largely driven by falling food prices. Producer price inflation improved, led by rising metals input costs, reflecting government‑driven investment in manufacturing and infrastructure. While inflation is expected to gradually recover, it remains low enough to allow further monetary easing if required.
Australian Monetary Policy and Fiscal Pressures
In Australia, the Reserve Bank increased the cash rate and signalled a willingness to tighten further if inflation remains elevated. The decision was unanimous, underscoring growing concern about entrenched inflation driven by capacity constraints, weak productivity, and easy fiscal policy. Government spending now accounts for a historically high share of economic output and employment, contributing to demand outpacing supply and keeping inflationary pressure elevated.
Domestic Growth and Government Spending
Leading indicators suggest Australia’s economic recovery is continuing into 2026, though momentum remains only modestly above trend. A substantial upward revision to government spending forecasts has raised questions about fiscal discipline and policy effectiveness. The expanding role of the public sector has supported employment and growth, but has also crowded out private sector resources, reinforcing inflation and extending the interest‑rate cycle.
Equity Sector Performance and Stock Themes
Rising commodity prices underpinned strong performance from miners and materials stocks during January, with several Australian resource companies delivering outsized gains. Retail also saw selective strength as companies implemented pricing strategies to recover rising costs. In contrast, technology and software stocks underperformed due to valuation concerns and fears of AI‑driven disruption. Bank shares remained expensive, particularly if interest rates stay higher for longer, implying pressure on valuation multiples across growth‑oriented sectors.
Outlook
The January update concludes that while economic resilience remains evident, risks are building. Elevated government spending, persistent inflation pressures, and structural shifts driven by AI are reshaping market dynamics. If interest rates remain higher for longer, equity valuations—especially in technology—are likely to face ongoing headwinds, while sectors linked to commodities and tangible assets may continue to find relative support.
