Julia Forrest: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to Pendal portfolio manager JULIA FORREST. Reported by portfolio specialist Chris Adams

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MIDDLE East tensions continue to weigh on markets.

Attacks on Saudi tankers in the Red Sea and hostile US-Iran rhetoric drove Brent crude up almost 10% last week and over 30% for the month, above US$100/bbl.

This played into inflation concerns, which pushed the US 10-year bond yield up 13 basis points (bps) to 4.68%, the highest point since January 2025, as markets priced in further monetary policy tightening.

Still, with US Congressional midterm elections under 100 days out, policymakers have growing incentive to ease tensions and limit the damage to inflation, sentiment and markets.

Strong earnings cushioned the risk-off mood, leaving the market just 2.7% off its all-time high, while the VIX (an index of equity market volatility) held steady at 19.1.

Trade tensions stayed in focus as the Trump administration imposed tariffs of up to 12.5% on 60 partners (including Australia).

US equities fell as higher oil prices, rising yields and AI-spending jitters hit sentiment — the S&P 500 dropped 0.6%, the Nasdaq fell 2.1%, with tech leading losses.

Alphabet slid despite strong earnings after lifting 2026 capex guidance by $15 billion to US$205 billion, while Tesla sold off on weak profitability and negative free cash flow.

Semiconductors stayed volatile. Intel’s upbeat outlook and AMD’s AI chip news offered some support, but the Philadelphia Semiconductor Index briefly entered a bear market as datacentre cost overruns, delays and cheaper open-weight models stoked fears of an AI capex overspend.

Investors are questioning the payback horizon on hyperscaler spending, while bond markets flag capital-competition risk, as heavy AI-related debt issuance meets an already large US deficit, raising the risk of crowding-out and higher yields.

In Australia, a sharp employment surprise drove an increase in bond yields.

June employment rose 76,000 versus expectations of 15,000, prompting markets to reprice the RBA outlook, with the odds of a hike by November 2026 now around 47%, up roughly 20 points over the month. This week’s CPI print will be pivotal.

Australian equities moved sideways, with the S&P/ASX 300 down 0.3%. Energy (+5.9%) outperformed on the oil surge, Materials (+1.8%) was supported by stronger copper and gold, while higher yields hit rate-sensitive sectors such as Technology (-6.5%) and Real Estate (-1.8%).

Energy led commodity markets, with Brent crude rallying 9.9% for the week on Middle East supply risks.

Copper gained 1.6% and is now up 12.3% year-to-date, supported by tightening Chinese inventories and supply constraints.

Gold rose 1.4%, while iron ore eased 0.4% to around US$98/t amid ongoing softness in Chinese steel demand.

AI: A return on capex versus a capital markets story

Persistent volatility in the tech sector is being driven by the interplay of a number of factors:

1. Capex rising. Alphabet fell ~7% last week despite beating on every headline number with group revenue +24% and Google Cloud revenue +82% year/year.

Investors looked past the beat and focused on the raise: FY26 capex guidance lifted US$15 billion at the midpoint to US$195–205 billion, driving the company’s first negative free cash flow quarter since its 2004 IPO (-$5.9 billion).

Adding to the optics gap, Alphabet also disclosed a US$94.1 billion SpaceX stake and booked a ~US$98 billion unrealised fair-value gain on it. In aggregate, hyperscaler free cash flows are expected to turn negative in 2027.

2. The funding shift. Hyperscaler capex has gone from largely self-funded to increasing reliance on debt and capital markets.

Morgan Stanley estimates ~US$1.8 trillion in off-balance-sheet AI commitments across the industry (leases, purchase obligations, financing).

Aggregate bond issuance for the five major hyperscalers (Oracle, Microsoft, Meta, Amazon, Alphabet) has almost doubled in 2026 versus 2025 and closing on 10x the amount issued in 2024.

3. Crowding in the same market. Hyperscalers aren’t the only ones competing for capital. The US alone is running a US$1.9 trillion deficit in FY26.

AI capex and record government issuance are now hitting the same bond market at the same time and the debate has shifted from can they fund it, to does the scale of combined demand start to move the cost of capital itself.

Thus far tech-related capex seems to have just crowded out other private capex, which has been a negative drag on US GDP growth since Q3 2024.

4. Rate sensitivity.  Hyperscalers and the frontier labs OpenAI and Anthropic (both private companies opaque on unit economics) have been largely rate-insensitive to date.

That won’t hold indefinitely: higher yields lift the return hurdle on every future dollar of capex, and end-demand is not rate-insensitive even if the builders are.

So far we haven’t seen the credit spreads widen materially (excluding Oracle), however the bid-to-cover ratios (a measure of investor demand) for hyperscaler bonds have been falling.

5. Returns are getting harder to defend too. Competition is heating up, and frontier models look increasingly alike.

Cheaper Chinese models, more efficient inference and model distillation all raise the risks that AI gets commoditised before the industry earns back its capital.

Much of the ecosystem has been running on a subsidy model — and that’s the part under the most pressure now.

Productivity gains from AI adoption are real but hard to quantify and so far, are accruing disproportionately to larger companies, not smaller ones.

6. What’s held the equity market together: passive flows. Equity markets have largely looked through all the above.

BlackRock’s Q2 2026 numbers show why: institutional investors pulled US$41 billion out of low-fee index equities, but that was swamped by US$178 billion of ETF inflows, much of it systematic, auto-pilot retail/401(k) flow, helping push BlackRock’s assets under management (AUM) to a record $15.3 trillion. That flow is arguably the marginal buyer keeping AI-exposed mega-caps supported.

Macro and policy US

The Redbook retail index same-store sales growth slowed to 8.2% year/year last week, down from 11.5% in early July, though spending remains resilient.

US consumers continue to absorb higher energy costs without pulling back spending, which means companies pass through cost pressures and protect margins.

That resilience is being funded by savings, not income: the savings rate has fallen from 4.5% in January to 3.0% in May.

If energy prices stay elevated, this drawdown — and the earnings support it provides — looks less durable.

Elsewhere, US weekly jobless claims fell to 187,000 in the week ended 18^th July, which is the lowest print since September 1969, though likely flattered by seasonal auto-plant shutdown distortions.

The trend looks real regardless: the four-week average dropped to 207,500, and continuing claims fell back under 1.8 million to 1.796 million.

With the labour market this resilient, the US Federal Reserve can stay focused on the inflation side of its dual mandate.

Macro and policy Australia

Australia’s June labour force report was much stronger than expected, with employment rising by 76,000 jobs versus market forecasts of around 15,000.

The increase was the strongest monthly gain in more than a year, highlighting the resilience of the labour market despite slower economic growth and higher interest rates.

It was also surprising given job ads/vacancies had been softer in the last few months. 

However, the strength in employment was matched by a surge in labour force participation, as more Australians entered or remained in the workforce.

As a result, the unemployment rate was unchanged at 4.4%, while underemployment rose to 6.5% — its highest level since mid-2024.

While employment remains strong, broader labour market conditions are easing.

Participation rose to a near-record 67.0%, likely reflecting more Australians seeking work or extra hours to help manage cost-of-living pressures.

The practical result is that the data is unlikely to materially alter the RBA’s near-term policy stance. While the strong employment number reduces the urgency for rate cuts, the rise in participation and underemployment offsets some of the apparent strength.

Fixed income markets are now pricing a 47% chance of a further hike by CY26 (+20bp on the month).

Having declared victory over inflation too early in 2025, the RBA is likely to be very cautious about cutting rates prematurely in 2027.

One factor in this could be that residential rental growth appears to be accelerating, with average national house rents +3.1% over the last month and apartments showing a similar increase, exacerbated by falling numbers of Australian rental listings.

Markets

US earnings season

US earnings season has been very strong, with 27% of S&P 500 companies reporting and 86% beating earnings expectations. As a result, both short and long-term consensus earnings growth rates have surged.

The spread between the S&P 500 trailing price to earnings (P/E) and the much lower forward P/E is about as wide as we’ve seen outside of 2000, reflecting investor conviction that earnings are set to inflect sharply higher over the coming year.

While the market is being supported by stronger earnings growth it is also scrutinising capital spending, with Alphabet and Tesla both selling off as investors questioned the returns on AI investment and the sustainability of cash generation.

Tesla fell 17.8% despite record deliveries, as investors reacted to growing margin pressure and negative free cash flow as the company plans to refocus on artificial intelligence and robots.

American Airlines (-13%) also struggled, with the group cutting earnings guidance for the second time in three months on the back of higher jet fuel prices, with the company stating it was only able to offset about 50% of the $2.2 billion in extra fuel costs through higher airfares.

US bonds

US bonds were up 13bp over the week to 4.68% lifted by oil prices, crop prices at a three-year high and stronger US employment data.

This is a level that starts to make US Treasury Secretary Scott Bessent (and equity markets) twitchy, however given the S&P 500 has been supported by strong earnings growth there has been no panic yet. Thirty-year bond yields also shifted higher to ~5.20%.

Australian equities

The S&P/ASX 300 was down 0.3%, although it softened as the week progressed.

The energy sector was strongest as Woodside, Santos and Beach Energy all caught a bid.

Materials held up too, supported by stronger copper and gold (BHP, Rio, Northern Star, Evolution the main beneficiaries).

However, higher oil prices and stronger employment data pushed the Aussie 10-year yield briefly above 5% alongside a similar move in US Treasuries.

The IT sector (-6.5%), Communication Services (-4.0%) and AREITs (-1.7%) bore the brunt as higher yields hit the growth stocks/bond proxies hardest.

Australian REITs

There has been a large divergence between the performance of US REITs (~+19%) and Australian REITs (~-9%) year-to-date.

Reasons for the gap include:

• US REITs have a large exposure to data centres and industrial/logistics — the sectors benefitting from AI infrastructure buildout. While Goodman Group (GMG) has a large data centre pipeline, performance has been held back by a lack of leasing deals.
• While both sectors have been exposed to rising bond yields, Australian REITs have been hit by a tightening cash rate. US REITs have access to long-term fixed-rate debt, which constitutes ~90% of the sector’s debt.
• In Australia, money has piled into the miners, gold and energy and left listed property trusts in the dust. It’s a rotation that just doesn’t have a real US equivalent this year.

Looking at the similarities, both AREITs and US REITs have the same underperforming subsectors – residential and office REITs.

There is still a great deal of uncertainty around how the residential cycle plays out. Within our listed property portfolios, we have a preference for affordable residential providers and land-lease companies, rather than the traditional residential developers.

In the office market, there are some early signs of recovery, with net absorption of office space shifting back into positive territory after being overwhelmingly negative since 2020.

We are seeing signs of a similar recovery in Australia, particularly in the core of the Sydney CBD.

Even if we were to see large headcount reductions, this may not lead to an increase in office vacancy rates as company workforces have grown much faster than occupied space.

A hypothetical 20% fall in white collar employment would just see ratios of employee/workspace fall back to long-term averages.

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