Markets are rising — but risks haven’t disappeared

Global markets generally moved higher over May, building on the strong rebound seen in April, although gains varied across regions. Global equities rose by around 5.6% over the month, while US markets reached record highs late in May. The S&P 500 ended the month at 7,580, up around 5% in May. A large part of that strength reflects solid company earnings and continued investment in artificial intelligence-related infrastructure and technology. This ongoing business investment remains an important support for equity markets and for confidence in longer-term growth trends.

The experience was more uneven at a regional level. Australian shares rose over May, but much more modestly. The S&P/ASX 200 increased by around 0.8% over the month, compared with much stronger gains globally. This highlights how local markets can respond very differently depending on their sector mix and domestic economic conditions.

In Australia, the Federal Budget and the interest rate environment were both important developments during May. From an investment perspective, the 2026–27 Federal Budget was notable less for short-term support measures and more for proposed changes to the taxation of capital gains, property investment and discretionary trusts, alongside an underlying cash deficit of approximately A$31.5 billion for 2026–27.

While detail will continue to evolve, these proposals point to a potential shift in how different asset classes are taxed over time. This may influence the relative attractiveness of investments such as residential property, commercial property, shares and assets held outside superannuation.

At the same time, the Reserve Bank of Australia increased the cash rate by 0.25 percentage points to 4.35%, reflecting ongoing concern about inflation and the impact of higher fuel and commodity prices.

Together, these developments reinforce a more cautious domestic backdrop. While markets have remained resilient, higher borrowing costs, persistent inflation pressures and the prospect of policy change add another layer of complexity for Australian investors.

Developments in the conflict in the Middle East have remained an important part of the backdrop. These events are serious, continue to evolve, and add to an already complex environment shaped by elevated inflation pressures and tighter financial conditions.

What matters in the current environment is not simply that geopolitical risk exists, but how it interacts with pressures that are already present.

Energy markets are often the most visible starting point, but the more significant effects tend to emerge through less visible channels. Higher fuel costs, refining constraints and disruptions to supply chains can flow through to transport, production and broader economic activity, influencing both inflation and growth over time.

Energy markets reflected these dynamics through May. Brent crude rose to around US$114 per barrel early in the month, before falling to around US$92 by late May as expectations of easing tensions improved. This highlights how quickly market sentiment can shift as geopolitical conditions evolve.

Despite this backdrop, equity markets have remained resilient. However, the rebound has not removed the underlying uncertainty. One of the more notable features of May has been the growing gap between what sharemarkets and bond markets appear to be signalling. While sharemarkets have performed strongly, bond markets have remained more cautious, reflecting ongoing concern about inflation persistence and the likelihood that interest rates may remain higher for longer. This is compounded by worries about the future scale of government borrowing in the US and some European economies.

This difference matters because it makes the overall market signal harder to interpret. When markets are sending different messages, it becomes more difficult to rely on any single indicator in isolation.

For superannuation members and customers holding investments, the key point is that stronger market returns do not mean risks have disappeared. What we have seen through May is an environment where performance has remained positive at a global level, but where the drivers of that performance are more mixed. Some markets have benefited from growth optimism, while others continue to reflect caution around inflation, interest rates and global developments.

At CFS, portfolio construction reflects this uncertainty. Diversification across asset classes, regions and investment styles remains central, alongside ongoing monitoring of inflation, interest rate volatility and geopolitical developments. We continue to diversify our investments to manage risk and position portfolios to navigate a range of market conditions.

This approach is designed to balance capturing long-term growth opportunities with managing shorter-term risks and volatility.

Different parts of markets respond differently to the same set of conditions, and a diversified portfolio is better placed to manage those differences over time. Periods like this highlight the importance of diversification, valuation discipline and long-term thinking in navigating uncertain market environments.

While returns through May have been relatively strong in aggregate, the broader environment remains complex. Inflation, interest rates, domestic policy settings and developments in the Middle East are all likely to remain important influences in the period ahead. In this environment, maintaining a disciplined and diversified investment approach remains critical.