The end of cheap money.
SEPTEMBER QUARTER 2026 · MARKETS & PORTFOLIO OUTLOOK
Central banks began raising rates again, bond yields climbed to their highest in around two decades, and conflict in the Gulf pushed oil back above US$100. Here is what changed this quarter, why our Barometer has turned more cautious, and where we see opportunity.
IN BRIEF
Interest rates are rising again. The US Federal Reserve raised rates in September for the first time in this cycle, and the RBA followed with its fourth increase this year, taking the cash rate to 4.60%.
Bond yields jumped to their highest levels in around two decades, raising the cost of money for governments, companies and households alike.
Conflict in the Gulf flared again, sending oil back above US$100 a barrel and keeping inflation pressure alive.
Shares hit records in August, then fell in September. Energy led; banks and other rate-sensitive shares lagged. New tax rules for investors are now law, and property investment has cooled sharply.
In June we promised to revisit our views each quarter. Two important calls were wrong: we expected the RBA to stay on hold and the Middle East conflict to keep easing, and neither happened. The larger themes — a hawkish Fed, pressure on housing and the banks, and caution on private credit — played out as we expected.
01 THE QUARTER IN MARKETS
Records in August, a rate shock in September
For much of the quarter shares extended their run. Global markets pushed higher on strong company earnings and the continuing boom in artificial-intelligence (AI) investment, and Australian shares set a record high in early August.
The mood turned in September. Renewed fighting in the Gulf sent oil back above US$100 a barrel, US diesel prices reached record highs and European gas prices surged. With inflation still above target almost everywhere, central banks responded by raising rates: the US Federal Reserve lifted its policy rate for the first time in this cycle, and the RBA followed at the end of the month. Government bond yields jumped — the US 10-year yield moved above 5%, its highest in around two decades — and shares fell as borrowing costs rose.
Beneath the headline, leadership changed. Energy companies were the strongest part of the US market, while banks and other rate-sensitive shares lagged. In Australia, bank shares fell sharply in August as the housing market turned, and the local market ended the quarter roughly where it began, returning around 1% including dividends. Gold had a volatile quarter. In August it rallied strongly after the US Treasury, under Secretary Scott Bessent, unexpectedly doubled its purchases of long-dated government bonds in an attempt to steady a falling bond market — a move many investors read as a willingness to hold down borrowing costs, which tends to favour gold. The rally faded in September as real yields — bond yields after inflation — climbed to around 2.25% in the US. Gold pays no income, so when investors can earn a solid return above inflation from government bonds, the cost of holding it rises.
Indicative direction over the September quarter, as at 30 September 2026. Past performance is not a reliable indicator of future performance.
What this means for you
The rise in bond yields is the most important market change this quarter. It makes borrowing dearer and puts pressure on share prices — but it also means high-quality income investments now pay more than at almost any time in the past two decades.
02 WHAT'S DRIVING OUR THINKING
The forces shaping the next twelve months
Rates are rising again — and not just in Australia
The defining change this quarter is that the world’s major central banks have returned to raising interest rates. The Fed, the RBA, the European Central Bank and the Bank of Japan have all tightened, and markets expect more. The reason is not a weak economy — the US economy is growing solidly and spending is strong — but inflation that remains stubbornly above target, now reinforced by higher energy prices. The Fed has also stopped signalling its next move in advance, which leaves markets more sensitive to each new piece of data.
The price of money has reset
Long-term government bond yields have risen to their highest levels in around two decades across much of the developed world. Three forces are behind it: persistent inflation, large government deficits, and very heavy borrowing — including by the technology giants funding the AI build-out. Higher yields matter for every investment, because they raise the return any asset must offer to be worth holding.
The price of money
US 10-year government bond yield
Approximate yields at each date; the end-September level is the highest in around two decades. Bars drawn from zero. Past performance is not a reliable indicator of future performance.
Why are bonds and shares falling together? Because yields are rising for reasons that hurt both: inflation that will not settle, and governments borrowing heavily to fund large deficits, which increases the supply of bonds that investors must absorb. In that environment higher yields lift the hurdle for shares without making bonds a safe haven.
When do bonds beat shares — and why we are not there yet
Government bonds tend to outperform shares in a particular setting: when economic growth slows sharply, unemployment rises and inflation falls. Central banks then cut rates, bond yields fall and bond prices rise, just as company earnings come under pressure. Today the conditions point the other way — the US economy is growing solidly, inflation remains above target and central banks are still raising rates. We are watching for the signs that would change this: a clear rise in unemployment, inflation turning down, and central banks signalling that rate rises are over. Until then, we see high-quality income as a source of steady return rather than a bet on falling yields.
The Gulf conflict is back on the agenda
Renewed fighting in early September reversed the easing we described in June. Oil returned above US$100, peaking near US$115 in late September, and diesel and European gas prices — the most stretched energy markets — rose even faster. Energy flows through the region have been slowly recovering, and a genuine de-escalation could bring prices down quickly. But for now, energy is the main reason central banks cannot ease.
US profits are booming — but the cash bill is rising
US company earnings remain exceptionally strong. Profits for the largest US companies grew around 26% over the year to June, analysts expect close to 30% for the September quarter, and the gains have been broad: the typical company grew earnings by around 12%, well ahead of expectations. Some of the headline figure was flattered by one-off gains on holdings in private technology companies, but the underlying picture is still the strongest in years.
The question is cash. The largest technology companies plan to spend close to US$800 billion this year building AI data centres, rising to more than US$1 trillion in 2027 — and that spending is now absorbing almost all the cash their businesses generate. The combined free cash flow of the four biggest spenders fell from around US$60 billion at the end of 2025 to about US$7 billion in the June quarter, and a growing share is being funded with debt, just as interest rates rise. Profits are reported today; the cost of the equipment arrives over the years ahead as it is written down. History offers a useful guide: in past technology booms, the first interest-rate rise was a warning rather than an immediate sell signal — share markets often kept rising for months afterwards — but it marked the point at which the boom became more fragile. We are treating it the same way.
Australia: slower profits, slower growth
The contrast with Australia is stark. Australian company profits grew around 12% in the year to June, but almost all of that came from miners, energy companies and the banks; excluding them, earnings barely grew. During the August reporting season analysts cut their forecasts for the year ahead by around 2% — roughly twice the usual pace — with three companies downgraded for every two upgraded. The wider economy tells the same story: Australia grew at an annualised pace of about 1.6% in the first half of the year, while the US economy is tracking several times faster.
Unemployment is edging up and consumer confidence has fallen, yet underlying inflation remains around 3.6% — well above the RBA’s target — which is why the Bank has kept raising rates. Housing is where the pressure is most visible, and the new tax rules are adding to it. This is a large part of why we hold a smaller weighting to Australian shares than in the past.
What this means for you
Higher rates, dearer money and a fragile late stage of the AI boom call for a more careful approach than last quarter. That does not mean abandoning shares — it means being paid properly for the risks we take.
IN FOCUS
The new tax rules for investors
The May Budget made the most significant change to how Australians are taxed on investments since the capital gains discount was introduced in 1999. The changes are now law, but the main ones do not begin until 1 July 2027.
Two changes matter. The first is capital gains tax. From 1 July 2027, the 50% discount on gains from assets held for more than a year will be replaced for individuals, trusts and partnerships by indexation — so only the gain above inflation is taxed — with a minimum tax rate of 30% on those gains. This applies to shares as well as property. Importantly, gains made up to 1 July 2027 keep today’s discount; only growth after that date falls under the new rules. The family home remains exempt.
The second is negative gearing. For established residential property bought after Budget night on 12 May 2026, rental losses from 1 July 2027 can only be offset against income and gains from residential property, not against wages or other income. Property owned before Budget night, and newly built homes, are exempt.
Property has felt the change first. Combined with four interest-rate rises this year, it has cooled investor demand: national home values have fallen for six consecutive months to sit 5.2% below their March peak, almost every capital-city suburb has lost value over the past three months, and home sales are running about a fifth below a year ago. Sydney, now 8.6% below its peak, has fallen hardest. Rental yields have risen to their highest in several years — a sign that investors now need the rent, rather than the tax benefit, to justify a purchase. The effects reach beyond property: slower investor lending is one reason bank shares have been weak.
For shares, the picture is more balanced. Long-term share gains will be taxed more heavily for many investors from mid-2027, and the 30% minimum rate will matter most for those on lower incomes. But shares are untouched by the negative gearing change, and because established property has lost more of its tax advantage than shares have, we expect some investment money to shift gradually towards shares, fixed income and other income-producing assets. When growth is taxed more heavily, income — particularly franked dividends — becomes relatively more valuable.
Superannuation stands apart. Super funds are excluded from the new rules. Long-term gains inside super keep their one-third discount, for an effective tax rate of 10% during the accumulation phase, and earnings that support a retirement pension remain tax-free. With gains held in personal names set to be taxed more heavily, super has become relatively more attractive as a home for long-term investments — within the annual limits on how much can be contributed. The exception is very large balances: since 1 July 2026, earnings on the portion of a member’s balance above $3 million are taxed at a total rate of 30%, rising to 40% above $10 million.
What this means for you
There is no deadline to beat. Gains made before 1 July 2027 keep today’s tax treatment, so there is no reason to sell investments in a hurry. But the new rules will change how and where it makes sense to hold assets over the years ahead — including the role superannuation plays. We’d encourage you to speak with us, and with your accountant, before making any changes.
03 FIXED INCOME & CREDIT
Yields at multi-decade highs — an opportunity, handled with care
Bond prices fell this quarter as yields rose, which is the short-term cost of a rising-rate world. The longer-term consequence is more welcome: high-quality bonds now offer yields well above their average of the past fifteen years, and investors can lock in returns that were unavailable for most of the last decade.
How that yield is earned matters. Floating-rate and shorter-dated securities, whose income resets as rates rise, held up best through the volatility, while longer-dated bonds fell further. If growth slows more than expected, longer-dated bonds would be the main beneficiaries, as yields would likely fall — which is why we see a role for both, carefully balanced.
Private credit in Australia: under the spotlight
Stress in private lending became visible this quarter, both overseas — shares in several large US private-credit managers fell sharply in September — and at home, where the market came under intense scrutiny. The corporate regulator, ASIC, has made poor practices in the sector an enforcement priority, warning about unrealistic property valuations and opaque fees, and the collapse of a large Sydney property developer left several private lenders exposed. Some funds have since restricted withdrawals. It is worth understanding where the problems lie: between 40% and 60% of Australian private credit is lending against real estate, much of it to developers and builders, and that is where the stress has concentrated.
We continue to see private credit as a valuable part of an income portfolio when it is done well. It lends to businesses the banks have stepped back from, its income is typically floating-rate and so rises with interest rates, and lenders are now being paid more for each dollar lent, on tighter terms, than a year ago. Globally, the rate at which borrowers are actually failing to make payments remains low — around 2.5% on one widely used US measure — and large institutional investors, including one of Australia’s biggest super funds, are adding to the asset class rather than retreating from it.
Two principles guide our approach. First, we focus on private credit that is not exposed to property, where Australia’s problems have been concentrated. Second, manager quality matters more here than almost anywhere else in a portfolio: good and poor outcomes come down to disciplined lending, realistic valuations, transparent fees, and withdrawal terms that match the loans a fund actually holds. Those are the tests every private-credit manager we use must pass.
Across our own fixed income sleeves, results were mixed, and income did most of the work. Our floating-rate and higher-quality credit holdings returned roughly 0.5% to 1.5% for the quarter, with income more than covering small price moves. Our short-dated government bond holding slipped slightly as yields rose, its income only partly offsetting the price fall. Several of our listed credit trusts were weaker: their unit prices fell as investors grew more wary of credit, and for these the price fall outweighed the income earned, leaving returns of roughly −1.5% to −5%. The income from these holdings continues to be paid, but the market is demanding a bigger discount to hold them — a reminder of why we favour quality and keep each position measured.
What this means for you
For the first time in many years, high-quality income offers a genuine return in its own right. We are taking advantage of that — but through quality and a sensible balance of floating-rate and fixed-rate holdings, not by reaching for yield.
04 HOW WE DECIDE
Inside the Cedar Equity Weighting Model
The most important decision we make is not which shares to own, but how much share-market exposure to hold at all. Our Barometer answers that through three lenses — valuation, monetary policy and trend. Last quarter it sat in balance. This quarter two of the three have turned against shares, and the third needs watching.
Valuation: fair on earnings, poor value against bonds
On earnings alone, share valuations are not extreme. At the end of September the S&P 500 — the main US share market index — traded on about 19 times expected earnings, down from just over 20 at the end of June because profits have grown faster than prices. The technology-heavy Nasdaq 100 is dearer, at around 22 times, but its earnings are also growing faster. Australian shares trade on about 17½ times despite much slower expected growth. None of these is at the extremes seen at past market peaks.
What you pay versus what you get
Price-to-earnings ratio against expected earnings growth, major share markets
Forward price-to-earnings ratios and consensus earnings growth over the next 12 months, approximately, as at 24 July 2026. Source: LSEG/Refinitiv consensus data, as compiled by Betashares. Since then the S&P 500’s ratio has eased to about 19 (FactSet, end of September). Lower and further right means cheaper for the growth on offer. Forecasts may not be achieved.
The concern is value relative to bonds. Because bond prices have fallen and yields have risen, the earnings yield on US shares, about 5.2%, is now slightly below the 5.3% yield on a 10-year US government bond. Investors are currently receiving no extra return for taking on share-market risk, a margin that has historically averaged around three percentage points. Valuation is a headwind not because shares are extreme, but because bonds now compete for the same money.
Monetary: restrictive
Both the Fed and the RBA are raising rates, lifting the cost of capital for every business and the hurdle for every investment. Only broader financial conditions remain reasonably easy.
Trend: the lens we are watching most closely
Trend is what keeps us invested. Global markets remain above their long-term trend, but momentum is fading and Australian shares have slipped below theirs. It tells us whether caution should become action.
Taken together, the Barometer points to caution, and our portfolios reflect that. We are not adding to share exposure, new money is being directed to cash and high-quality income, and we are prepared to reduce share exposure further if the trend breaks decisively.
What this means for you
We are more defensive than last quarter: invested while markets hold their trend, and ready to act quickly if they do not.
05 WHERE WE SEE THE NEXT OPPORTUNITY
Income is back — and the world is bigger than America
When shares offer little extra reward over bonds, the best opportunities are often found where investors are paid properly for the risk they take. Two areas stand out, and both are supported by our own models as well as by the broader research we review each quarter.
The first is high-quality income. After years in which cash and bonds paid almost nothing, yields on high-quality bonds and floating-rate securities now sit at their highest in well over a decade, comfortably above what they have averaged since the global financial crisis. That gives income investments something they have lacked for years: a credible case to deliver a positive return in their own right, with far less dependence on share markets. Floating-rate securities are particularly well suited to a world of rising rates, because their income rises with them.
The second is diversification beyond the United States. The US market has become dominated by a small group of AI-linked giants and trades at a substantial premium. Share markets in Europe, Japan and the emerging economies trade on markedly lower valuations — as the chart in Section 04 shows, around 15 times expected earnings in Europe, 16½ in Japan and 10½ in the emerging markets, against about 20 for the US market and 22 for the Nasdaq 100 at the same date — and are far less concentrated in a single theme. They have also rewarded investors: after beating the US by a wide margin in 2025, developed markets outside the US have broadly kept pace this year.
Shares offer little reward over bonds, and the US market is heavily concentrated in AI-linked giants.
Income that pays in its own right, and share markets priced for less perfection.
Both sit where we like to be in a cautious phase: paid properly for the risk, and less dependent on any single outcome.
What would change our mind
If inflation re-accelerates and yields keep climbing, longer-dated bonds would fall further — which is why we favour floating-rate and shorter-dated securities alongside them. A sharply stronger Australian dollar would reduce the value of offshore returns. And a disorderly end to the AI boom would not leave markets outside the US untouched, even if they are better placed to absorb it.
What this means for you
We are leaning towards investments that pay us to hold them and markets that ask less of the future — a sensible posture while the price of money is rising.
06 HOW WE'RE POSITIONED
Cautious, income-focused, and ready to act
Stable. The core remains invested, but we are not adding to share exposure. New money and distributions are being directed to cash and high-quality income, and we have a clear plan to reduce share exposure if the market’s trend breaks. Within fixed income we favour quality, with a balance of floating-rate and fixed-rate securities.
Growth. As we outlined to Growth clients with their June reports, the strategy has been re-centred on a broad, diversified core of global shares, with a smaller Australian weighting and satellite positions sized for the risk they carry. Where we see no clear share-market opportunity, Growth can now hold high-quality fixed income that offers a better return than cash. Growth also retains a small, long-term position in the nuclear-fuel theme, sized for its volatility. The same Barometer and discipline now guide both strategies.
Currency. We continue to hold our global shares largely unhedged. This quarter the Australian dollar edged higher, trimming returns on our offshore holdings by a little under one percentage point — the mirror image of the tailwind we described in June. We hold that exposure deliberately, mindful that the currency can move both ways.
Cash remains a genuine choice. With the cash rate at 4.60%, we will not hold any investment simply because it is labelled “defensive” — every holding must earn its place.
07 HOW WE THINK AT CEDAR
A repeatable process you can see
Our goal is straightforward: avoid the large losses that derail long-term plans, while capturing a meaningful share of the upside. We pursue it with evidence over opinion, discipline over forecasting, and a process we are happy to show you — the same Barometer, the same questions, the same hurdles, every quarter. Markets will always offer reasons to act on emotion. Our job is to make sure your portfolio doesn’t.
HOW CEDAR THINKS · THIS QUARTER
Prepare, don’t pre-empt
The large losses that damage long-term plans rarely arrive without warning signs — but warning signs often appear months before a fall, and sometimes the fall never comes. Selling on a hunch risks missing some of the best months a market offers. So we separate preparation from action. When valuations and policy turn against shares, as they have now, we prepare: we stop adding, build cash and income, and set out in advance exactly what would prompt us to reduce. We act when the market’s trend genuinely breaks, not before.
“We would rather miss the first day of a downturn than the best months of an upswing. Discipline beats prediction.”
If you'd like to discuss what any of this means for your own portfolio, we'd welcome the conversation.
A few terms. The Cedar Barometer — our read of valuation, monetary policy and trend, used to decide how much share exposure to hold. Earnings yield — a company’s expected profits as a percentage of its share price; comparing it with bond yields shows the extra reward shares offer for their risk. Floating-rate — securities whose income resets as interest rates change. Sleeve — a group of holdings grouped by role. Unhedged — offshore holdings whose value rises and falls with the Australian dollar.
This document has been prepared by Cedar Asset Management (Australian Financial Services Licence No. 503883) for general information purposes only. It is general advice and does not take into account your objectives, financial situation or needs. Before acting on any information in this note, you should consider its appropriateness having regard to your own circumstances and, where appropriate, seek personal financial advice. Information about taxation is general in nature, reflects our understanding of the law as at the date of writing, and is not tax advice; you should seek advice from a registered tax adviser about your own circumstances. Past performance is not a reliable indicator of future performance, and no forecast, outlook or example in this note is a guarantee of any future return. Market figures are approximate, are dated as at 30 September 2026 unless otherwise stated, and are drawn from sources believed to be reliable but not independently verified. Any view on a sector or asset class is a house view as at the date of writing and may change without notice; it is not a recommendation to buy or sell any specific financial product. Investing involves risk, including possible loss of capital. © 2026 Cedar Asset Management. All rights reserved.