July In Review: Australia Beats AI & The USA

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This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies.
For more info SHARE ANALYSIS: CBA
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

July is historically a good month for investors and 2026 lived up to expectations with a surprise rally in financials, energy and healthcare stocks, but August reporting season looms large.

• The rotation out of AI proved a boon for the Australian market 
• Financials were the surprise winners in July, can it continue?
• Australian stocks face a confluence of headwinds and possible AI-tailwinds
• August reporting season, strap in for the ride

By Danielle Ecuyer

The Australian market emerged like Lazarus from the bearish ashes

The ASX200 seemingly climbed the proverbial “wall of worry” in July and, as highlighted by Morgan Stanley, reversed its year-to-date underperformance against global peers.

Including dividends the index returned 2.3%, outperforming both the S&P500, down -0.1%, and the Nasdaq Composite, down -3.2%. The latter experienced its worst July since 2004.

In contrast, the Dow Jones Industrial Average posted its largest four-month percentage gain since February 2024.

Meanwhile, the high-flying MSCI Korea Index fell -24% in local currency terms as the memory chip trade, led by Samsung and SK Hynix, descended into full-blown profit-taking.

Why do the comparisons matter for Australian investors?

Because global financial markets are more interconnected than ever.

While geopolitical tensions and geo-strategic forces continue to encourage de-globalisation, the free movement of capital has arguably never been more apparent, even in the relatively small Australian market.

The market capitalisation of the S&P500 recently reached US$70trn, while the broader FTSE Russell 3000 now stands at around US$75trn to US$76trn.

By comparison, the ASX is worth only around US$2.7trn, while Japan, the world’s second-largest equity market, is valued between US$6trn to US$7trn.

Australians are increasingly investing overseas, while global investors are becoming more active participants in the ASX.

Smaller markets without sovereign risk, like the ASX, offer attractive trading opportunities for hedge funds, quantitative investors and algorithmic traders.

Expect more volatility.

Which sectors were the lifters and leaners?

As highlighted by Macquarie, banks were the surprise standout in July, rising 7.6%. The broker attributes the move largely to positioning rather than improving fundamentals.

Apart from UBS, whose team of banking analysts recently became more constructive on institutional lending linked to infrastructure, defence investment and non-housing sectors, sector analysts generally remain downbeat on the banks.

Hardly surprising.

The sector continues to face challenging macroeconomic headwinds, while housing lending, the traditional bread-and-butter business of the major banks, is not exactly firing on all cylinders.

Yet, banks were the ASX’s second-best performing sector in July, behind Energy, which rose 12.1% following yet another escalation in tensions between the US and Iran.

Financials contributed 196.3bps to the ASX200, followed by Energy at 49.9bps, while Materials detracted by -21.5bps and Industrials by -10.1bps.

The Materials sector slipped -0.9% as iron ore prices fell -4.4%, although investors can hardly complain following a 45% rise for the sector over last year.

Morgan Stanley highlights CommBank ((CBA)) as the largest contributor to index gains, adding 81.5bps, followed by National Australia Bank ((NAB)), Westpac ((WBC)), Woodside Energy ((WDS)) and ANZ Bank ((ANZ)).

Health Care also enjoyed a better month, largely underpinned by CSL ((CSL)), which added 15bps to the index.

The positioning referred to by Macquarie reflects the view that banks have been, and may continue to be, used as funding shorts against long positions in AI enablers.

As AI-related stocks sold off across the Nasdaq and Korea, those short positions were covered, helping drive the rally in Australian banks.

Likewise, the ASX technology sector fell -4.8%, taking its lead from the unwind in the AI enabler trade, with data centre operators such as NextDC ((NXT)) among the weaker performers.

If some of the volatility in ASX-listed technology or AI momentum trades felt extreme, spare a thought for US-exposed investors.

As outlined by Bangkok-based funds manager and avid market commentator Stephen Innes, the Goldman Sachs TMT (technology, media and telecom) momentum basket had gained around 145% up to June 22 before experiencing its worst drawdown in history, only to rebound 17% in a single session at the end of July.

Notably, the forced liquidation of momentum AI trades inside the leveraged Situational Awareness hedge fund was, in hindsight, part of July’s broader unwind of the AI momentum trade.

Macquarie points out the US momentum factor fell -13.3%, while, in a rare occurrence, US value outperformed by 5.7%.

Value beat growth again in Australia, with 3.22 percentage points of outperformance. The AI rotation was not confined to the United States.

The Hang Seng rose 13.13% as investors looked to Chinese AI technology leaders such as Alibaba and Tencent, while the FTSE100 gained 3.35%, again reflecting a rotation out of the AI technology trade.

Some laggards in Australia, which had suffered over the last 12-months from the AI, SaaS and related sell-offs, equally rallied from the rubble. WiseTech Global ((WTC)) shares lifted 10%, while marketplace stock REA Group ((REA)) advanced 15.5% on higher property listings.

Looking beneath the surface of the ASX200, Morgan Stanley points out performance was concentrated in large-cap stocks, which rose 3.7%, while small caps (Small Ords) fell -3.2%.

As to why small caps copped the selling, maybe the proposed CGT tax legislation, as well as tighter monetary policy, left some investors worried (?).

Will there be more RBA rate hikes?

One positive for the Australian market came from the repricing of expectations for further RBA rate hikes.

UBS, one of the more hawkish economic forecasters, explained the June CPI print in the last week of July supported the case for the RBA to remain on hold at 4.35%.

If Australia is at peak rates, the expected narrowing between short and long-term bond yields, referred to as compression in the yield curve, should assist highly interest rate-sensitive sectors like the A-REITs.

The sector is down -7.2% over the last year and slipped -0.8% in July.

UBS points out the last time the RBA paused its rate hiking cycle, in November 2023, the A-REIT sector generated a total return of 37% over the following 12 months, or 24% excluding Goodman Group ((GMG)).

During that cycle, the sector re-rated to a PER multiple of 18.3x from 14.4x, despite the RBA remaining on hold for 15 months before the next rate cut in February 2025.

UBS views the current setup as “particularly attractive”. The fixed income market is now pricing in around half a rate hike between now and December, down from around 1.3 hikes three months ago.

UBS economists, however, still anticipate one further rate hike in November, having previously expected one in August.

While Australia’s relative outperformance may have surprised some domestic investors, other markets outside of the USA also delivered strong returns in July.

August results… soon all shall be revealed…

As the market now turns the page on July, attention shifts firmly to the August reporting season.

Macquarie forecasts FY26 EPS growth of 8.9%, with Resources expected to grow earnings by 28.4% versus Industrials at just 0.8%.

From a seasonality perspective, Macquarie’s historical data-crunching shows July has typically been one of the strongest months for equities, while August has also historically delivered positive returns, albeit at a more modest 0.8%.

Morgan Stanley believes this reporting season will be particularly meaningful in testing the macro assumptions underpinning markets over the year ahead.

It is easy to suggest every reporting season is “different”, but the convergence of multiple macro themes arguably makes the next four weeks more significant than usual.

Morgan Stanley groups the key issues into several buckets, including the RBA rate hiking cycle, the diesel-linked energy shock, AI adoption rates and associated productivity gains against higher average wage growth, as well as the impact of tax reform and wealth distribution across major segments of the economy.

CommBank points to the flow-on impacts from the disruption to energy markets caused by the Middle East conflict, noting June ABS household spending was boosted by a “large uptick in spending on new vehicles”, particularly electric vehicles.

The RBA meeting on August 11 also looms as a key event and will help set the tone for interest rate pricing.

Morgan Stanley notes the ASX200’s 12-month forward PER now stands at 17.4x, above the long-term average of 14.9x, but below the 2025 high of 20.0x.

Consensus aggregate earnings forecasts were lowered during July, with FY26 downgraded by -1%, while FY27 and FY28 forecasts were cut by -2.5% and -2.3%, respectively.

Morgan Stanley notes downgrades were concentrated in the Energy and Materials sectors. Aggregate FY26 consensus EPS growth has now eased to 11.9%, with FY27 at 11.3%, representing declines of one percentage point and -1.7 percentage points, respectively.

The 12-month forward dividend yield now sits at 3.5%, well below the long-term average of just under 4.5%.

Macquarie’s 12-month consensus PER stands at 17.8x for the ASX200, split between 13.8x for Resources and 20.1x for Industrials.

This broker’s FOMO meter eased by -0.28 in July to plus 0.73 after briefly moving into FOMO territory above 1 during the month.

Active managers reduced equity exposure by around -19 percentage points to 79.7%, while individual investors turned net bearish at -11%.

Both the upcoming US mid-term elections and the possibility of another Federal Reserve rate hike are expected to weigh on sentiment in the near term.

Like Morgan Stanley’s US strategist Mike Wilson, Macquarie continues to favour quality stocks ahead of the US mid-term elections and recommends increasing exposure to defensive sectors.

The broker believes October may provide a more attractive opportunity to add risk.

Morgan Stanley also remains cautious on Australia, moving the market to Underweight as part of its Asian strategy.

This broker argues the RBA tightening cycle, the first contractionary Federal Budget since FY18 and a “structural housing reset” have created the “slowdown we had to have”.

Aggregate EPS growth expectations are viewed as skewed to the downside, with potential earnings compression across banks, consumer discretionary and housing-linked sectors. Morgan Stanley’s 12-month target of 9,250 for the ASX200 implies only limited upside from current levels.

If reporting season doesn’t already feel overwhelming enough, results will arrive in rapid succession from August 12 onwards. Around 80% of companies are scheduled to report between August 17 and 28, leaving investors little time to digest one update before the next.

Against elevated valuations, an evolving AI narrative and uncertainty surrounding the RBA’s next move, August is shaping as one of the more consequential reporting seasons in recent years.

Finally, one last parting thought around short positions. Such has been the negative positioning by traders that, like the US reporting season, results which are ‘better-than-feared’ might catch those with short positions in a race to cover.

This could well be the reason why shares in Pinnacle Investment Management ((PNI)) rallied hard on a not too flash FY26 result. 

Is there more to come?

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

Do note: the graphs above include the first three sessions of August.

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