Key takeaways
- AI is driving growth, but the benefits are increasingly uneven across the market.
- Software is moving from market darling to pressure point, as AI-driven disruption challenges the durability of the SaaS model and drives a sharp reset in valuations globally.
- Volatility is set to persist as policy, rates and narrow earnings growth keep markets uneven, reinforcing a more cautious backdrop despite headline resilience with a deeper consideration set for stock specific earnings outlook as clarity improves.
As we move into the second half of the year, markets are navigating a complex mix of geopolitical uncertainty, policy shifts and persistent inflation. While earnings growth remains intact, much of this is being driven by a handful of powerful structural themes.
AI continues to drive growth while reshaping valuations
Artificial intelligence (AI) and rising commodity prices are dominating the drivers of earnings and multiples in the Australian small- and mid-cap universe.
AI’s impact is broadening, extending into business consulting, engineering, finance, business software, legal and healthcare industries. We expect productivity benefits to flow over time; however, fear and uncertainty around job losses, which have already begun to emerge, are likely to require changes in workflows and skill sets. Business innovation leadership has come into question, putting pressure on multiples across software, communication services, consumer technology, medical technology and financial services. The durability of existing software or service moats, franchise strength and the ability to stay ahead of AI-driven product innovation are becoming increasingly important considerations that we expect to come into sharper focus over the next few years.
Capital investment into AI in 2026 is currently running towards US$1 trillion, up from US$260 billion in 2024. This not only highlights AI’s rapid growth but also its scale in the global technology landscape. Competition for leadership is driving significant flow-on effects across data centres, associated engineering services, cooling systems, semiconductors and memory storage, as well as related commodities such as copper.
For Australia, the positive flow-on benefits of AI have primarily been seen in the resources sector. Beyond the AI build-out, commodity prices have risen and remained higher for longer in 2026, supported by resource scarcity, a growing preference for physical over financial assets, and the appeal of HALO (heavy assets, low obsolescence) businesses. These assets are viewed as defensive, with low beta characteristics and rising replacement costs that continue to underpin strong valuation support.
Software disruption drives a broader market reset
The “SaaSpocalypse”, a term used to describe the high level of uncertainty surrounding the valuation and durability of the Software as a Service business model, reflects a sector that has been highly profitable over the past two decades but is now facing increasing challenges from AI agents and workflow systems. In the Australian market, this has driven a sharp decline across software businesses in real estate, automotive, employment, medical technology and accounting. Offshore valuations have also fallen significantly, with many stocks now trading on single digit price-to-earnings (PER) multiples, down from 30–40 times in recent years.
Volatility expected to remain
Factor leadership has shifted towards value and momentum, while quality has underperformed as duration concerns have weighed on companies traditionally viewed as having more predictable and resilient earnings profiles.
In this context, the outlook for the Australian market remains challenged from multiple angles. The 2026 Federal Budget tax changes are likely to create disruption across residential property and broader investment markets, while also reinforcing a more disciplined environment across asset classes. Interest rates are expected to move higher as inflation remains elevated for longer.
There is still double-digit earnings per share (EPS) growth expected over the next 12 months, and index-level valuations are not elevated at around 16 times forward earnings. However, much of this growth is being driven by resources and energy, with limited breadth across other sectors remaining a key concern. With consumer and business investment sentiment still subdued, caution is likely to persist. Positively, the Australian market continues to expand, which we believe will support index performance over time.
