Quarterly market commentary - September 2026

If the third quarter of 2026 had been submitted as a film script, a director might have sent it back for being too ‘busy’.

There was continuing conflict in the Middle East, another rise in energy prices, renewed inflation concerns and interest rate increases from several central banks. At the same time, businesses continued spending heavily on artificial intelligence (AI), the global economy kept expanding and most share markets finished the quarter higher.

Growth in the face of gloom might feel contradictory. However, as the quarter demonstrated, both can occur at the same time.

Economies and markets absorb many influences at once. Consumers can feel less confident, but it doesn’t mean they stop spending. Businesses can face higher costs while still increasing profits. Share prices can rise during an unsettled period because markets care more about anticipated future company earnings and less about immediate news headlines.

The third quarter offered another reminder that the economy, investment markets and the news cycle may be related, but they are not the same thing.

Resilience, not retrenchment

The world economy entered the quarter carrying a sizeable list of worries. Geopolitical tensions remained elevated, energy and transport costs were under pressure, and government finances were stretched in many countries. While these economic conditions are generally unfavourable for growth, a potential global downturn failed to materialise.

In July, the International Monetary Fund (IMF) projected global growth of 3.0% for 2026. In doing so, it described an uneven world in which technology-related demand was helping offset the higher energy prices resulting from the conflict involving Iran. In September, the United Nations update was more reserved, estimating lower growth of 2.6%, but reaching the same broad conclusion – that growth was subdued rather than collapsing.

For many investors, that’s an important distinction. Slower growth doesn’t mean ‘no growth’. Elevated uncertainty doesn’t mean businesses stop operating.

Capitalism has fashioned a long track record of successfully adapting to changing economic conditions. In other words, the world economy has a habit of figuring out how to function effectively, even when economists and news outlets might be debating everything in the world that could potentially go wrong.

This development, largely unanticipated by the Trump administration when the war began, was the collateral damage that spilled over into the global economy.  

Inflation returned to the front of the queue

The less welcome development was renewed inflation pressure. An energy shock rarely stays confined to the petrol station. Diesel is, of course, used to power trucks that move food and other goods around an economy. So, higher oil and fuel prices eventually work their way into increased transport, manufacturing and household costs.

With prices of most goods and services being affected, central banks remained on high alert. Their natural response to higher inflation is to raise interest rates. However, a potential outcome of ‘tightening’ rates is that it can lead to reduced economic activity and even slower growth. So, decisions to raise interest rates are never taken lightly.

In the US, the Federal Reserve increased rates by 0.25% on September 16 and forecast US inflation at 3.7% for 2026, noting that a sizable majority of committee members saw "upside risks" to this central forecast. Perhaps not surprisingly, the committee anticipated at least one more interest rate hike before the end of the year. In Australia, the Reserve Bank lifted its cash rate by 0.25% in September to 4.60%, its fourth increase of the year, while retaining the option to tighten further if required.

Not every central bank was confronted with exactly the same economic conditions, but they all faced a similar problem – inflation had become harder to dismiss, while economic growth generally remained strong enough to tolerate higher interest rates, if required.

For households, higher interest rates mean better term deposit rates but also higher mortgage costs. For investors, rising interest rates put downward pressure on bond prices and on the valuations of companies whose expected profits are anticipated far into the future. But that relationship is not absolute. If interest rates are rising because economic activity and corporate earnings are resilient, share markets can still perform well.

Building the AI engine while driving it

Continuing recent trends, AI remained one of the largest sources of global investment during the quarter.

The amount of capital invested in AI-related technology has been so significant that the IMF estimates it alone added approximately 0.5 percentage points to US economic growth in 2025. It also reports estimates suggesting global private-sector AI investment volumes could exceed US$2 trillion in 2026.

To put that staggering sum into context, US$2 trillion is approximately two times the total value of New Zealand’s entire housing stock! That’s quite an incredible sum to be pouring into AI-related technologies in the space of just one year. 

Of course, that money is not only being spent on software. It is also funding semiconductors, data centres, electricity generation, cooling systems, telecommunications networks and construction. In other words, AI investment is positively affecting the wider economy even before anyone can confidently measure its ultimate productivity benefits.

Business adoption of AI is also very real, although highly uneven. For example, in the IMF’s February 2026 update, it noted that around 41% of US information-sector businesses were reporting using AI, compared with roughly 13% of manufacturers and 11% of construction firms. Although this AI transformation is being felt throughout the wider economy, it is clearly not occurring at the same speed everywhere.

The jury is also still out about AI’s likely long-term impact on productivity and employment. There is simply not enough evidence (yet) to declare that AI will produce permanently higher productivity across economies, or that it will eliminate employment on a large scale. The IMF’s analysis suggests that workers with AI-related skills are benefiting, while some middle-skilled occupations exposed to automation may be more vulnerable. It also warns that the eventual returns from today’s enormous capital expenditure are far from guaranteed.

The AI investment boom is clearly observable and is contributing to positive economic outcomes, but the eventual winners, losers and effects on wages and productivity are still being discovered.

A demographic headwind

While technology and AI developments are occurring at a rapid pace, there is a much slower-moving economic force that we shouldn’t ignore – demographics.

Across much of the developed world, populations are ageing and the number of retirees is rising relative to the working-age population. The OECD expects old-age dependency ratios to reach unprecedented levels in many member countries over the next 35 years and warns that, without positive changes in workforce participation and productivity rates, growth in income per person is very likely to slow.

Migration can help ease labour shortages by bringing in new workers, however migration policy varies sharply between countries. It would therefore be unwise to take a migration story specific to one country and apply it automatically elsewhere.

For investors, demographics are another important part of a complex economic ecosystem. Slower labour-force growth increases the importance of skills development and productivity enhancements. AI may become part of that answer, but it is not yet possible to know how large a part.

What investors experienced

Despite the difficult headlines, global shares generally delivered another small positive quarter.

In the US, the S&P 500 Total Return Index rose 2.3% and the MSCI World Index gained 2.0%, while the MSCI Emerging Markets Index was -0.2% lower, all measured as gross returns in US dollars. New Zealand shares also gained, with the S&P/NZX 50 Gross Index producing a quarterly gain of 1.9%.

Bonds had a more difficult quarter as market yields increased on the back of renewed inflation concerns and growing expectations that central banks may need to contemplate further interest rate hikes. The Bloomberg Global Aggregate Bond Index (hedged to NZD) delivered -2.9% over the quarter.

These figures are not directly applicable to every New Zealand portfolio because differences in underlying investor risk exposures, currencies, hedging, tax and implementation timing all have an impact on an individual investor’s precise returns. They nevertheless tell the quarter’s main story – shares generally rose while longer-duration bonds struggled.

Ironically, anyone who correctly anticipated higher oil prices, central bank tightening and rising geopolitical tensions might have reasonably expected share prices to fall. That would have appeared to be the logical economic conclusion to draw from the convergence of these events.

However, the market’s reaction defied that simple analysis.

Predicting the news is difficult. Predicting both the news and how markets will interpret it is harder again.

The New Zealand perspective

The New Zealand economy continued to recover, but the recovery remained patchy.

New Zealand’s GDP increased by 0.2% in the June quarter after a 0.9% rise in March. So, the economy continued to grow, although not at a pace that made conditions feel dramatically better for most households.

Inflation was a key concern here also. Annual consumer price inflation reached 4.1% in June, up from 3.1% in March. Energy prices had a significant impact on this with the cost of petrol rising 27.5% in the 12 months to 30 June 2026.

The Reserve Bank responded by increasing the Official Cash Rate by 0.25% in both July and September to a new benchmark of 2.75%. For borrowers, this dispelled any lingering hopes that mortgage rates might be preparing for a decline. For savers and bond investors, higher interest rates tend to make new fixed income investments more attractive, although existing bond prices generally weaken as bond yields increase.

New Zealand’s labour market remained soft with unemployment increasing slightly to 5.6% in the June quarter and annual wage inflation running at 2.0%. Meanwhile, migration continued to add to the population, although at a slower rate than during the post-border reopening surge. Net migration was positive by 20,300 people in the year to July 2026, up from 9,600 a year earlier.

Unsurprisingly, the housing market remained soft, reflecting this mixed domestic environment. The national median house price was $750,000 in August, down 1.3% from a year earlier, while the REINZ House Price Index was down 0.9%. Overall, sales volumes were 13% lower and properties were taking longer to sell, although conditions varied substantially by region. Canterbury’s median price was 1.5% higher than a year earlier, while several North Island markets remained weaker.

The export sector was one of the brighter areas, with a 15% increase year-on-year in total goods exported (as at 31 August 2026). Agricultural export conditions were looking increasingly favourable on the back of improving dairy and meat prices, strong horticulture volumes and a lower New Zealand dollar.

Built to flex, and to last

A well-designed portfolio is a little like a suspension bridge.

A suspension bridge is not safe because it can predict every gust of wind. It’s safe because it allows different parts of the structure to absorb pressure in different ways. Some components are responsible for carrying the load. Other parts provide flexibility. The strength of the bridge comes from how the different pieces work together.

Diversification reflects similar principles. Shares provide access to long-term business growth. Bonds provide income and can offer stability when economic growth weakens, although they will not do so in every quarter. Cash provides liquidity. Global diversification reduces dependence on any single country, sector or economic outcome.

During the third quarter, bonds struggled while shares generally made small gains. In a different quarter, those positions could easily reverse. Unfortunately, no-one knows in advance when that will happen. That’s why investing involves risks that we need to be aware of and prepare for, due to the inevitability they will one day occur.

The objective is not to build a portfolio with the flawed expectation of trying to win every quarter. It is to build one capable of remaining resilient through many different quarters to ensure you stay invested long enough for that robust investment structure to do its job.

For a detailed review of the market commentary for the quarter, see ‘Key market movements - March 2026'

Disclaimer

While every care has been taken in the preparation of this newsletter, Consilium makes no representation or warranty as to the accuracy or completeness of the information contained in it and does not accept any liability for reliance on it. Information contained in this newsletter does not constitute personalised financial advice and does not take into account your individual circumstances or objectives.