Monthly Newsletter Large Potential Disruption By AI Spooks Markets.

Published on 23 February 2026

Markets were off to a blistering start in 2026. The S&P/ASX 300 Accumulation Index rose 1.72% in January. Global shares extended their rally for a tenth consecutive month, with the MSCI World Index gaining 2.19% in USD terms. However, despite positive returns from the major share markets around the world in January, they hit a snag in February led by global metal prices. Silver fell ~40% from its peak all but erasing January’s parabolic run, the Australian dollar strengthened amid higher interest rates and there was a bout of stock marker weakness in the US as markets digested Warsh's nomination as chair of the Federal Reserve. Gold was not immune from the weakness, falling as much as 20% from its recent high, though paring losses. Some moves seemed less of a unique metals story and instead part of a broader risk-off repricing as the potential disruption by AI spooks markets.

The risk-off repricing also came on the heals of fears that there will be large disruption by AI on the software industry. The release of advanced AI tools (from companies like Anthropic) that can automate complex tasks in legal, finance, and marketing sparked panic that standalone software tools might become redundant. In the US, companies like SAP (-16%), Salesforce (-28%) and AppLovin (-47%) have all suffered since the middle of December 2025. In Australia, the share price of Technology One (-29%), Wisetech (-37%) and Promedicus (-47%) have suffered.

United States: Labour Market and Fiscal Policy

In the US, the January employment report exceeded expectations, pointing to a genuine pickup in labour demand and reduced the urgency for near-term easing of monetary policy. Despite the strong January employment report, the trend in labour demand remains sluggish, as evidenced by slower wage growth, lower quit rates, and low job openings. The improvement in the labour market partly reflects increased policy support. Interest rates have reduced short-term borrowing costs while fiscal policy has also become more expansionary. Several provisions of the One Big Beautiful Bill Act (OBBA), such as the bonus depreciation allowance, were made retrospective to the start of 2025. Fiscal support is expected to strengthen further, with an estimated $150 billion in additional tax rebates to be distributed in coming months all lending support to growth. The Tax Foundation estimates that in 2026, the average taxpayer will get $3,800 back from the government, compared with $1 500 for each of the last two tax years. Lower tax revenues are also likely due to staff cut backs at the IRS. Lower tax revenues will mean a wider government deficit, and therefore more net spending being ploughed into America’s economy, even if tax breaks for firms and wealthy individuals do not raise aggregate spending as much as giveaways to less well-off taxpayers. That might contribute to a pre-election sugar rush and, eventually, a nasty inflationary hangover. This looks like a 2027 / 2028 issue.

For now, headline inflation has cooled slightly to 2.4% from 2.7%. Similarly, core inflation has cooled to 2.5% from 2.6%, in line with estimates. Core goods inflation declined from 1.4% to 1.1%, while core services was roughly unchanged at 3.0%. Interestingly, leading indicators of inflation point to a further decrease later this year. Leading indicators for goods inflation also suggest tariff pressures have crested. Markets are not signalling concern, expecting inflation around 2.5% over the next year. Overall, as highlighted last month, the U.S. economy is expected to show resilience, though momentum is softening.

China: Inflation and Economic Outlook

We have been writing for some time that China’s property market collapse has caused a deflationary pulse in the economy that continues to cause a headwind to growth. An acceleration in inflation in December was primarily attributable to rising food prices. This reversed in January where the CPI recorded 0.2% from 0.8% thanks to the decline in food prices with the biggest drag coming from pork (-13.7%), eggs (-9.2%), and alcohol (-1.8%). Non food inflation eased to 0.4% from 0.8% over the year the lowest level in six months. Price developments across non food categories were mixed. Transportation and communication, travel and tourism services, and rents remained in deflation, while inflation accelerated in household appliances and communication appliances, reflecting the impact of trade in policies implemented by the government to stimulate demand. Overall CPI inflation continued to increase at a steady 0.2% month on month pace, suggesting that prices are on track for a gradual recovery in 2026. CPI inflation is forecast at 0.9% in 2026, with key risks stemming from domestic policy implementation and global price dynamics.

Producer prices in China continued to recover, rising to 1.4% from 1.9% led by a sharp rise in non ferrous metals input prices (16.1%). This strength was also reflected in ex factory prices for non ferrous metals mining (22.7%) and smelting and rolling industries (17.1%). Most other categories remain subdued. As mentioned last month, the Chinese economy is being pushed along by debt-fuelled public investment in areas such as manufacturing and infrastructure. The gap between the growth target and consumption is unsustainable however not imminent. The economy should slow from its circa 5% rate if government spending slows and consumption does not increase. Despite expectations of a recovery, inflation remains relatively low and should not preclude further monetary easing in 2026.

Australia: Interest Rates and Government Spending

In Australia, the RBA increased the cash rate and signalled that it would continue tightening policy if inflation did not ease. The risks of a longer interest rate cycle are building particularly given easy fiscal policy. Most telling was that the decision to tighten policy was unanimous among Board members. A unanimous Board shows that previously dovish members have been brought around to the upside risks facing the economy. Critically, the Board believes “that some of the increase in inflation reflects greater capacity pressures. As a result, the Board considers that inflation is likely to remain above target for some time”. Capacity coupled with weak productivity is at the heart of the inflation problem, with demand outpacing the economy’s ability to supply goods and services.

The Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity in 3-9 months, was broadly consistent with 2025’s recovery carrying into 2026. However, the momentum is only modestly above trend, having stalled through the middle of last year. An outright strong growth pulse still looks to be some way off. The mid-year budget update included a record revision of AUD 47.8 billion government spending forecasts, which calls into question the accuracy of the Treasurer’s budget papers and the quality of advice used by cabinet ministers to shape policy. The amount reflects what the government is expected to spend on the uptake of social support programs, such as home battery subsidies, as well as the impact of the student debt relief scheme.

A large part of the reason that demand is outpacing the economy’s ability to supply goods and services in Australia is government spending. Public spending now generates a record 35% of domestic output, 7% higher over the decade and is linked to nearly 40% of total employment, a 9% increase over the same period. The rising public share of activity accounts for around 1.3m additional jobs. The expansion in public spending has lifted output and employment across a broad swathe of the economy. The median public share of output across market industries has risen from around 17% to 25% over the past decade, underscoring the scale of indirect spillovers. It is most pronounced in construction and some services sectors. This shift carries important implications. Rising demand from the public sector has reduced the share of labour and capital available for private-sector purposes known as “crowding out.” Government spending has been a major factor to Australia’s elevated inflation levels. As the previous cutting cycle was quite shallow, the hiking cycle may be too.

Investment Committee Outlook

In November 2025 we wrote “outside of the AI hype, the broader share market landscape is relatively investor friendly. The investment committee sees that the share price increases we have witnessed in Australia and the US, moved valuations above fair value in the short term. Whilst it was recognised that the AI investment theme, which has lifted share prices (particularly in the US), will continue for many years, the level of capital expenditure (money spent by businesses to make future profit) has been large. Profits need to rise to justify the return on the capital expenditure. If not the return on shareholder funds will drop and so could the share price. This heightened risk has prompted our reduced exposure in the STAR Tactical portfolio. Share market volatility has increased and more volatility is expected.” This is still the case today. As mentioned above, there have been some very large moves in specific company share prices however the market index has maintained a high level. We are looking for an entry point as the sugar hit to come from the tax breaks in the US will continue to support growth.

STAR Portfolio Update

Within the STAR Accelerated Australian shares portfolio, performance lagged the index in January although has underperformed over the longer term. The Manager – Joseph Palmer and Sons, increased the portfolios holding of Wisetech over the month given the selloff. Wisetech and Siteminder were caught up in the AI / software related selloff, falling 15.3% and 16.5% respectively. Investors have taken a shoot first, ask questions later attitude for the whole software sector. There are plenty of stocks in this space that trade on very high multiples and so one could argue that this sell off was always coming, however the threat from AI is real and unforeseen outcomes likely. In the case of Wisetech and Siteminder, the companies have relatively sticky customer bases.

Within the STAR Accelerated International shares portfolio the Hyperion Global Growth Companies Fund has been caught up in the software company sell-off. ASML Holding NV, Costco Wholesale Corporation and Meta Platforms, Inc. saw the strongest share price performance, while Intuit Inc., ServiceNow, Inc. and Palantir Technologies Inc. saw the largest declines. The manager lowered the exposure to software companies in the portfolio alongside the sell-off in share prices to reflect the increased uncertainty relating its forecast long-term returns. In January, the manager removed Workday, Inc. (Workday) and Hemnet Group AB (Hemnet) from the portfolio, both of which were low weights, to concentrate the portfolio in the highest conviction ideas. Workday’s revenue growth rate had been moderating in recent years and their innovations to date in AI have largely relied on products that were acquired inorganically. Hemnet was a low weight in the portfolio (<1%), as it is a relatively small company in a small market. Alphabet was re-added to the portfolio in January driven by the reacceleration in the pace of innovation with regards to their frontier model development and further clarity of key anti-trust risk. Hyperion believes the revenue growth outlook has materially expanded for Alphabet across Search, subscription, and Google Cloud.

It is pleasing to see that QUAL outperformed the benchmark by 1% over the month and by 1.80% over the quarter. Longer term performance has been acceptable given the increased volatility we have seen and the massive threat of disruption by AI. The investment in QUAL, which provides access to high quality companies based on key fundamentals including high return on money invested in the business, profit stability and low financial leverage benefit from holdings in Alphabet – parent of Google and ASML – a lithography company.

US Earnings Season and Australian Shares

The earnings season in the US has been mixed thus far. We have been highlighting for some time that capital expenditure by large technology companies has increased dramatically. So far, profit results by Apple and Meta were positive surprises, while Microsoft was negative, and GOOGL was a case of a strong quarter, where the market worried about too much capital expenditure. The miss by Microsoft fits into the broader worries about software in general, where fears that AI is undermining the moat of even the large software companies. As a result, the share prices of software companies have diverged aggressively from semi-conductor companies. Interestingly, this divergence also explains country performance. Emerging Asia has outperformed not so much because of individual country dynamics but because of a strong focus on semi-conductor companies versus hardware companies. In Australia, Woolworths performed well in January as the company introduced a $2 surcharge for click and collect and delivery orders on Sundays and public holidays. Woolworths incurred an estimated ~$400 million in operating costs for click and collect alone that was not being recovered. Analysts estimate that the surcharge will recover ~$20 million in costs. South 32 (+30.14%) performed well in light or the rally materials in January. This surge was primarily driven by a broad mining market rally fuelled by all-time high prices for copper, silver, and gold. Bluescope Limited (+25.27%), Lynas (+21.93%), Northern Star (+18.46%) and Evolution Mining (+16.01%) all performed well due to material prices. Promedicus (-17.30%), Xero (-16.48%) and Wisetech (-15.39%) all lagged the broader index. The share prices were driven by valuation concerns and a sell-off in global software potentially threatened by AI. Bank share prices remain expensive with CBA at the helm of the group. If rates are indeed higher for longer it implies that valuation multiples should be lower particularly for technology stocks.

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