Are the recent NASDAQ, precious metals and bitcoin pullbacks signs that markets are turning?

While there has been market volatility to greet investors into the new year, we continue to maintain a relatively constructive view on risk assets and see scope for further gains in the year ahead. While markets will continue to face episodes of geopolitical uncertainties, stretched valuations, and divergent global economic and policy outlooks, we believe that investors should continue to focus on the ‘big picture’ – the key structural narratives that will ultimately prevail. Our Chief Investment Office explains further.

While we are only a handful of weeks into the new year, we have already witnessed a fair bit of market volatility:

• The first jolt came in the form of a surge in Japan bond yields: rising inflation and expectations that the Bank of Japan (BoJ) will hike rates through 2026 already had yields drifting higher, and then Japan Prime Minister Takaichi announced a snap election - offering up a plan to temporarily lower sales tax on food and beverages to 0% if re-elected, which raised fiscal concerns for investors;
• Gold and silver prices retraced much of their hyperbolic runup in January (with Bitcoin also dropping precipitously) – highlighting the speculative elements driving pockets of the markets; supposedly triggered by the announcement of Kevin Warsh as the new Fed Chairman Speculation as his likely policy biases, though realistically also due to the extraordinary run that both metals have shown in the last month – it appears likely markets were waiting for any reason to sell.
• Trump’s administration has announced actions and repeated rhetoric around Greenland, Iran and Venezuela; and
• There has been growing investor concerns about the market and economic impacts of AI - with an increased focus on the potential risks to the business models of Software as a Service (SaaS) companies. 

Despite all this volatility, most developed markets equity indices have been quite resilient. While large-cap US equities have eased back to be around the levels they were at year-end, Japan’s market hit new highs, and European indices have continued their quiet ascent.

Fundamentals are broadly supportive

We expect economic growth to be well supported in the first half of 2026:

• Growth remains steady, supported by ongoing fiscal support in the US and early stages of expansion in Europe and Japan. There is also the possibility of upside surprises from China.
• Inflation is generally drifting lower, although Australian prices are heading in the opposite direction.
• Monetary policy divergence is re‑emerging – the Fed has an easing bias (with further tailwinds from their easings from 2025), the ECB is maintaining its stance, Japan is moving gradually towards modestly higher rates…while the RBA has been forced to reverse course and has tightened interest rates at their first meeting in 2026.
• Even with the recent pullback, gold remains well supported, reflecting investors heading geopolitical risks and structural shifts in central bank reserve preferences.
• Corporate balance sheets are generally not overly leveraged.
• The USD has softened somewhat, creating a more favourable backdrop for non‑US assets – particularly emerging markets.

The main risk is that valuations and earnings forecasts prove to be too optimistic. Growing concerns on AI-related spending will also increase the volatility in markets.

One of the key questions for 2026 will be whether the US equity market can broaden or if concentration levels at the top of the index continue. A critical factor for a broadening of the market rally will be whether any lift in US consumption proves sustainable. Historically, household spending has been a key driver of US GDP growth – accounting for well over 60% annually.

The US labour market is still quite soft - although a decline in labour supply on the back of the sharp decrease in immigration has improved the outlook - and consumer confidence remains at pessimistic levels. Positively, the market is still pricing in further rate cuts in H1 ‘26. Add to this the stimulatory measures from the One Big Beautiful Bill (OBBB) – including the extension of the 2017 tax cut, increased deductions for state and local taxes, and the elimination of taxes on overtime and tip income – and the consumer should be better placed to spend in early 2026.

info-01

Source: Bloomberg

Last year AI‑linked mega‑cap tech shares were front-and-centre – a remarkable run, but one that increasingly demanded scrutiny around sustainability, valuation and capital intensity. We’re starting to see the early signs of rotation: notably, adopters of AI – particularly in industrials, automation, software, and infrastructure – have shown signs of strength.

Given the strategic sovereign importance of AI technology and robust balance sheets of hyperscalers, it would be premature to call an end to this cycle. Nonetheless, we are closely monitoring indicators such as hyperscalers free cash flow, AI adoption rates among large firms and any resultant productivity gains, and AI firms’ potential ability to develop code that might imperil the business models of dedicated SaaS companies.

Irrespective, we will need to see further evidence of real-world applications for technology stocks to retain leadership. We are assessing whether the year ahead may instead favour those companies that can demonstrate tangible use cases – and whether China can be a formidable competitor in the race for AI supremacy.

With small-cap EPS growth expected to lift through 2026, assisted by potential OBBB stimulus and rate cuts, there is room for market leadership to rotate – however, we are not yet convinced it can be sustainable.

Emerging markets have benefited from improved capital flows and easing global financial conditions – and we believe these trends are set to continue to support  emerging market equities.

We expect that the path for markets will likely continue to be defined by episodic volatility, uneven growth, monetary policy divergence, and shifting sector dynamics. While AI remains central to the narrative, the potential for a broader rally – driven by stimulus, rate cuts, and improving earnings in lagging sectors - may yet surprise. We continue to favour European and Japanese equity markets, mega-cap US tech and emerging market equities given valuation and stimulus dynamics.

What this means for multi-asset portfolios

We continue to favour growth assets across multi-asset portfolios, while maintaining a long duration exposures as a hedge against equity risk.

Within developed market (DM) equities, we continue to see better prospects for the European and Japanese markets. We prefer to hold DM equities on a currency-hedged basis, based on forecast trends – particularly for a stronger AUD and a weaker expected USD.

Emerging market equities continue to offer more attractive valuations and higher earnings growth potential than developed markets and we remain overweight accordingly.

With a global recession looking unlikely in the year ahead, we continue to hold a small overweight to high yield bonds – while credit spreads are tight, yields remain attractive given we believe that the trajectory for growth remains reasonably sound.

While we have been underweight in Australian equities for some time, to reflect the upside momentum we are seeing in domestic earnings we are have moved back to a neutral position.

We expect to see ongoing volatility given heightened geopolitical risk, elevated policy uncertainty, the coming US mid‑terms, a risk of re‑widening of global trade tensions and questions around the sustainability of AI capex. However, we believe that utilising a well-constructed strategic asset allocation, with suitable risk diversifiers and hedges, will help moderate some of this short-term volatility while the broader pro-risk backdrop is expected to continue to accrue positive portfolio outcomes.