While the Aussie bond market is expected to continue attracting an unprecedented number of global investors in 2026, the same can’t be said for Aussie equities, with headwinds brewing in the local economy likely to put a drogue on corporate earnings.
While State Street Investment Management doesn’t expect a material deterioration in the state of the Aussie economy, it’s concerned that limited catalysts for further domestic growth coincide with an improving outlook globally.
With that in mind, the firm’s 2026 Global Market Outlook (GMO) urges Australian investors to prioritise diversified global portfolios.
That means tilting portfolios to have a lower home bias, especially when it comes to Australian equities, with the investment manager remaining cautious on their valuations and momentum, which remain unattractive.
Gold will offset uncertainty
“Diversifying across asset classes including Australian fixed income – which we think is attractive at this stage, offering income, capital preservation and diversification – and gold will also help investors deal with the still considerable uncertainty in global markets,” noted State Street in its recently released 2026 Global Market Outlook.
Given its low correlation with equities and resilience in times of uncertainty, State Street claims gold, which is holding firm above a key support level around US$4,192.36 per ounce, is an essential component for portfolio diversification.
With macro tailwinds supporting gold, recent forecasts have upgraded the base case price range for gold to US$3,700–4,100/oz.
Meanwhile, the most bullish scenario would see gold reach US$5,000/oz and would require a confluence of Fed easing, persistent ETF inflows, and renewed central bank demand.
Tilt to alternatives
Beyond gold, State Street expects private equity, private credit, and select hedge fund strategies – notably macro, equity hedge and risk-parity - to play a larger role over the next 12 months as confidence in the traditional 60/40 stock-bond mix continues to wear thin with investors.
The firm believes growing investor appetite for alternative asset classes in recent years reflects a greater need for portfolios to withstand volatility and a growing set of macroeconomic, policy and geopolitical risks.
In addition to managing risk and generating income, State Street sees alternatives as increasingly central to capturing growth in an environment where traditional drivers are under strain.
“In today’s more divergent macro landscape, the imperative for alternatives is broader: portfolios must be built to withstand not just volatility, but also regime shifts,” the report notes.
“Investors need exposures that deliver sustainable income, provide genuine diversification, and give access to growth themes that are reshaping the global economy.”
AI drives overweight US equities outlook
Despite the talk of it overheating, State Street expects AI optimism to continue underpinning global equities in 2026, which explains why the investment manager maintains a slight preference for U.S. stocks.
But while U.S. equities, supported by transformative AI investment, robust capital spending, and supportive fiscal policies, remain at the forefront of global markets, State Street reminds investors that a careful eye on valuation risks is also warranted.
Beyond headlines dominated by the Magnificent 7, State Street analysts expect AI to play a broader role in shaping capital flows, sector leadership and macro momentum in 2026.
“We remain constructive on equities while recognising that market valuations are expensive – and not just in the U.S.,” the State Street GMO notes.
“Higher volatility is likely to return at some point, along with the possibility of market adjustments, but these should be short-lived and overall we remain upbeat for 2026.”
While State Street favours government bonds over credit across most major economies, it is also witnessing signs of a turnaround in the fortunes of small caps that have historically outperformed when the economy improves, and monetary policy eases.
