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, which came on October 21, and ended the year at 8714.3 points.
The selloff coincided with a changing outlook on inflation, causing traders to shift their forecasts for further rate cuts to a possible hike. A rise in interest rates is generally seen as downward pressure on stocks, as it makes funding more expensive for businesses and weighs on consumer spending.
Two of the Big Four banks are expected to raise rates at the first Reserve Bank of Australia meeting of the year in early February, while none are predicting additional rate cuts.
The rate outlook partly explains the recent difference in performance between the ASX and Wall Street, with the US market recording strong double-digit returns on the back of December’s rate cuts and the prospect of more to come.
Wall Street’s strong performance has also been boosted by AI driven by the country’s big technology stocks, which contrasts with Australia’s resources and banking-led market.
BetaShares chief economist, David Bassanese, says the key question for the Australian economy in 2026 is whether inflation can remain low without the need for greater monetary restraint and slower growth.
2. geopolitical risk
Most analysts expect global and Australian equity markets to rise in 2026 despite the presence of geopolitical risks, including rising tensions between Beijing and Taiwan and a US oil blockade of Venezuela.
Traders ignore geopolitical risks until they disrupt physical supply chains.
The possibility of the AI bubble bursting and signs of global inflation resuming led to a wave of volatility in 2025, although many investors used the selloff to increase their stakes.
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The challenge with bubbles is that, even if investors know a bubble is forming, they often struggle to predict when it will actually burst.
Basnis says the market is still in the “early to mid-stage of a potential bubble” as AI computing capacity outstrips supply.
UBS expects AI to drive further gains in global equities, although it warns investors to remain “mindful of bubble risks.”
Meanwhile, the value of crypto assets, including Bitcoin, has declined in recent months due to rising fears around a market bubble.
IG Australia market analyst Tony Sycamore expects the best-known crypto asset to move lower in the new year, with a potential retest of its 2025 lows following Donald Trump’s “Liberation Day” tariff announcements in early April.
A decline in the value of Bitcoin would be bad news for many young Australians who are looking to crypto as a means of supplementing their income to pay for high living costs, including housing.
Data from financial comparison site Finder shows that young adults under the age of 30 are the biggest investors in crypto, with almost one in four putting money into the asset class.
3. silver and gold
Precious metals are on the rise due to huge gains in silver and gold as well as platinum and palladium.
CMC Markets analyst Luis Ruiz says precious metals are traditional safe-haven assets, and their appeal increases as uncertainty increases.
“The forces driving demand are deeply rooted and unlikely to abate any time soon,” says Ruiz.
“New investors continue to enter the market, while existing holders have no reason to sell unless they need cash or find a more attractive alternative.”
The spectacular rise in prices – silver is up more than 150% over the past year and gold is up nearly 70% in US dollar terms – means they have been susceptible to sharp corrections, but both assets have rallied following the recent selloff.
Given the country’s rich gold reserves and silver production, parts of the Australian stock market are well-positioned to benefit from ongoing demand for the precious metals.
The downside is that a sharp rise in precious metal prices could prove to be a warning sign of future economic trouble.
