The S&P 500 came close to notching a 10th consecutive weekly gain, and its best run since 1985, before a tech-led sell-off triggered sharp falls in risk assets on Friday.
The catalyst was surging US jobs data, sending 30-year Treasury yields back to 5% and implied rates up over 0.1%.
However, the set up to Friday’s price action was undoubtedly influenced by crowded positioning and the run-up in prices.
The Friday sell-off saw the S&P 500 close down 2.6% for the week, while the Nasdaq finished down 4.7%. Tech and Consumer Discretionary stocks led the US market lower, with Energy and Healthcare better.
The S&P/ASX 300 also ended last week lower, down 1.2%, but led by Real Estate, Materials and Financials. Tech was stronger for the week.
Yields moved higher across the board, with rate expectations rising.
Commodities were hit hard with iron ore losing 6.3% and lithium down 5.5%. Gold fell 4.9%.
Oil bucked the trend as a more permanent solution to the Iran conflict remains elusive. Brent crude rose 1.1% for the week (ex. oil on little/no Iran progress).
Crypto currencies were savaged, with Bitcoin down 16.8% and back below the level it was at when Trump was re-elected.
The US Dollar ended the week stronger despite another warning on the debt ceiling.
This week will see releases on Australian consumer and business confidence as well as data on consumer inflation expectations.
US CPI data will also be closely watched given global inflation expectations.
Warning signs or just crowded positioning?
The global economy is growing strongly at ~3% p.a. (~3.5% pre the Iran conflict).
Large fiscal impulses in the US (running a ~6% budget deficit) and China (~10% deficit) are supportive, and capex is broadening geographically and by sector, as seen in improving PMI data.
This is all constructive for markets.
However, there are also those becoming cautious on the AI trade.
As one commentator put it last week: “When they write the history of the AI bubble 2022-2027, the issuance by Google of $85 billion of stock in early June 2026 will be one red line that was crossed.”
Jensen Huang’s call that Marvell Technology “will be the next trillion-dollar company” saw it add US$51 billion to its market cap in the week, despite giving up US$46 billion of gains on Friday. We are in an era where such calls are seemingly routine.
AI euphoria abounds and positioning is crowded. Commodity trading advisers (CTAs) – systematic strategies that track price momentum and provide a good indicator of market positioning – have been very long equities.
But last week there were a number of warning signs flagged by those looking to call the top of the AI trade:
- IPOs galore. SpaceX will soon complete its US$75 billion raise at a US$1.8 trillion valuation (its Australia retail offering closes Wednesday). Anthropic (having recently raised US$65 billion at a US$965 billion valuation) filed to IPO last week and OpenAI is likely to follow soon (it raised US$122 billion earlier this year at a US$852 billion valuation).
- Ever-increasing capex; equity raises. While a huge part of Alphabet’s raise will go to meeting tax obligations associated with vesting of employee equity awards (US$30 billion), it will also increase spending to scale AI infrastructure and global compute. The Financial Times also reported Meta is considering following suit and raising tens of billions.
- Overly high expectations. Broadcom announced AI semiconductor revenue will be US$16 billion in its fiscal Q3, well below consensus expectations of US$17.2 billion.
- Growing AI costs. Uber and Walmart were the latest companies to limit internal AI usage given rising costs.
US macro and policy
Nonfarm payrolls triggered much of Friday’s price action, with the May data coming in at +172,000, versus +88,000 expected, mostly driven by unexpected hiring in Local Government, Leisure & Hospitality and Healthcare.
March and April were also revised higher, with the data raising the risk that a tightening labour market could drive up wages and add to upward pressure on rates.
While the JOLTS data also surprised higher earlier in the week (7.6 million job openings versus 6.9 million expected and 6.9 million prior), other data was less clear cut.
For example, the unemployment rate for May was in-line with consensus at 4.3% and average hourly earnings were as expected at 3.4%.
The former is key for the US Federal Reserve, with a rate above 4.2% unlikely to cause much concern despite stronger payrolls.
The risk is that payrolls remain strong, driving down unemployment and seeing a tighter jobs market stoke inflation.
While this is not consensus, the market nevertheless moved up rate hike expectations, which are now pricing in 1.1 hikes by December, versus only 0.57 last week.
We note that payroll data is volatile, subject to revision and the number of jobs is not reflected in the hiring rate implied by the JOLTS data.
In addition, consumer surveys show less confidence in finding a job and the most recent National Federation of Independent Business (NFIB) small business survey recorded a multi-year low for firm hiring plans.
There is a risk that the unemployment rate falls below CPI (which consensus expects to be 4.2%), which would be only the seventh time since 1960.
Years when inflation runs close to or above unemployment have historically seen Fed hikes and poor equity returns.
US debt
The US Treasury Department may need to use extraordinary measures as early as next year to avoid a national debt default.
According to a report by the Bipartisan Policy Centre, absent congressional action, the US will mostly likely reach the debt limit once again sometime between late winter and mid-summer 2027.
That is despite raising the ceiling US$5 trillion last year (to US$41.1 trillion). More than half of that has already been used up.
This likely comes into even sharper focus depending on the outcome of November’s midterms. We note gold rallied US$2,000/oz in the six months after last year’s ceiling raise.
Australia macro and policy
GDP
GDP grew 0.3% quarter/quarter in Q1 2026 – below consensus expectations of 0.4% and much slower than the previous quarter’s +0.9% (revised from +0.8%) – with more subdued consumer spending offset by booming data centre spend.
Growth since Q1 last year is still 2.5%, but 2026 will be materially lower (<2% versus global GDP of 3.0%, or 3.5% pre-Iran) as the impact from the Iran conflict, proposed tax changes and higher rates are felt.
According to the ABS, more modest growth quarter/quarter reflected subdued household and government consumption as well as adverse weather affecting mining exports.
Private sector investment in data centre machinery and equipment was the largest contributor to growth, however at least half of this is imported, hence there was a large corresponding detraction in net trade.
The key trend here is that capex is continuing to outperform consumption, with domestic final demand adding 1% to GDP growth, led by private investment at 0.7% and household spending at 0.3%.
Private investment grew 3.6%, with machinery and equipment up 16.3%. This mostly reflects increased investment in data centres.
While on its own the step-up in capex is inflationary, proportions matter here; capex excluding housing is ~20% of the economy while consumption plus housing is ~60%.
At the margin this increases how much the RBA needs the consumer to slow to be confident that aggregate demand is weakening, particularly given persistent high public sector spending.
Overall consumption rose 0.5%, contributing 0.3% to GDP.
Most of the increase was down to rising spending on essentials (+0.8%) with electricity, gas and other fuels up 11.7% as the energy rebates ended.
Discretionary spending rose 0.1%, with higher interest rates and fuel costs driving more cautious behaviour across most categories.
Given recent tax changes, falling house prices and potentially one more rate hike this year, a further deceleration in domestic demand appears likely.
Wages
The Fair Work Commission announced a 4.75% increase to modern award wage rates – at the top end of expectations, but in-line with the RBA’s forecast for headline inflation of 4.8% in FY26.
However, combined with other structural changes, the total lift in award wages is seen at ~5.2%.
This affects almost 2.8 million workers, or 21% of the labour force, but only 11.2% of the national wage bill.
As such, while inflationary and likely to add to pressure on the RBA, which had seen wages rising 3.2% through FY27, it is not hugely significant.
However, early forecasts for next year’s increase are for an additional 3.8%, well ahead of the RBA’s forecast for CPI at 2.4%.
House prices
Proposed tax changes are expected to reshape the housing market, compounding the impact of recent rate hikes.
Estimates for price declines this year range from low single digit to 10% (versus the Treasury at 2%), with turnover seen down as much as 20%.
This represents a headwind for the major banks given the likely slowdown in credit growth.
If investor credit growth slows to 0% (similar to 2019-21), overall housing credit growth would slow from ~7% to 4%, not far from the all-time low of 3% in 2019 – a period when banks underperformed the market by up to 20%.
Consensus currently estimates housing credit growth slowing from 7% to around 4-5%, but any additional rate hikes or material house price falls would likely trigger further revisions.
Feedback from Westpac during the week was that mortgage demand is rolling over faster than many expected, with applications down ~25% quarter/quarter in Q1 and softer again post-period, while investor flow share has fallen from ~40% to ~30%.
Around one-third of investor loans are linked to negative gearing benefits.
Interest rates
The market shifted from pricing an additional 0.71 hikes this year to 0.92 over the course of last week. Despite slowing growth, inflation is still seen as too high.
No change is expected at the meeting later this month, albeit the tone is expected to be hawkish.
This may see expectations for a hike in August increase, with some economists already predicting an increase.
They argue that while housing related data is the key near-term variable, the data will not have sufficiently weakened in time to hold off a further raise.
However, hiking into a slowing economy and slowing housing market is clearly higher risk, thus the RBA will likely need further evidence of inflation before then.
Board member Professor Ian Harper warned market measures of inflation expectations have taken an uptick and that strong action is needed to keep inflation expectations anchored.
Governor Michele Bullock noted the Iran conflict is creating a highly uncertain environment that could easily contribute to even higher global and domestic inflation than anticipated.
The conflict is expected to weigh modestly on growth in Australia this year, she said, noting that “this would worsen the trade-off between inflation and economic activity”.
But she does not see stagflation as a concern for Australia at this point.
She also sees the risk of inflationary expectations being embedded in the economy as low.
“Longer term inflation expectations are remaining anchored around the target (2.5%),” she said, “so I’d say the risk is low at this point. But short-term expectations have definitely risen, and that’s to be expected.”
Commodities
Last week was a volatile one for commodities as Iran headlines continued to dominate.
Oil finished up 1.1% for the week, driving down gold, which has been highly (inversely) correlated to movements in the price.
Bitcoin plunged on liquidations and a selldown by the dominant corporate buyer.
Elsewhere there was also a reasonable move down in iron ore, despite no fall in freight rates, while lithium gave up some of its recent gains on rebounding supply expectations.
On the currency side, the yen is worth a mention given it has risen above 160 (USD:JPY), which has been seen as a key level beyond which the Bank of Japan may intervene to prevent further weakening.
In the past, this has seen the country sell US Treasuries to fund the spending, pushing up yields.
Markets
The ASX has benefitted in 2026 from significant earnings upgrades across Mining and Energy stocks. This has seen Material’s ASX200 weighting climb 4.1% year to date (to 27.2%), with Energy +0.9% (to 4.5%).
At the other end of the spectrum, Heath Care is down 2.1%, Financials and Consumer Discretionary down 0.9% and Real Estate down 0.8%.
However, with Energy and Materials earnings momentum rolling off and the domestic economy slowing, overall earnings headwinds are building.
While we do not have a negative view of commodities, in many instances share prices have run ahead of underlying earnings momentum. For example, BHP has been the single largest contributor to ASX gains year to date, however, the recent fall in iron ore is driving lower mark-to-market earnings.
This may challenge recent gains, even as some commentators seek to portray BHP as an AI/data centre play.
IMPORTANT INFORMATION: This document has been prepared by Enhance Financial Partners, ABN 45 146 707 173 AFSL 515518, based on our understanding of the relevant legislation at the time of writing. While every care has been taken, Enhance Financial Partners makes no representations as to the accuracy or completeness of the contents. The information is of a general nature only and has been prepared without consideration of your individual objectives, financial situation or needs. Before making any decisions, you should consider the appropriateness for your personal investment objectives, financial situation or individual needs. We recommend you see a financial adviser, registered tax agent or legal adviser before making any decisions based on this information.