The markets begin FY26 at or near all-time highs, following an impressive FY25 performance despite much-larger-than-expected tariffs on U.S. imports, a dramatic increase in policy volatility and more hostilities in the Middle East.

While investors expected tariffs and a tougher stance on trade from the new administration, the moves taken exceeded the vast majority of expectations as tariffs were both higher and more far reaching than most expected.

Tariffs matter to the markets primarily because, if not properly executed, they could cause an economic slowdown, or worse, stagflation, where growth slows but inflation rises. Fears of a tariff-induced slowdown or return of stagflation were contributing factors behind the April decline in stocks.

Positively, economic data remained mostly resilient throughout the period and there are no major economic indicators pointing to a material slowing of growth or a sudden rise in inflation. That resilient data in the face of tariffs and geopolitical turmoil contributed to the market rebound.

Finally, geopolitical risks undoubtedly rose with direct conflict between Israel and Iran (including U.S. involvement in the war) and no progress on a ceasefire on the now three-year-long war between Russia and Ukraine. However, the market views these conflicts as largely isolated and not at risk of spreading into a larger regional war that could disrupt oil production or the global economy. Because of that, markets largely ignored the increase in geopolitical tensions.

However, while the market was impressively resilient over the past three months, it would be a mistake for investors to become complacent in this environment, because there remain a lot of risks facing the economy and markets.

First, while the market has assumed that tariffs won’t rise substantially from current rates, there’s no guarantee of that. To that point, the deadline for the reciprocal tariff delay is July 9th and if that deadline is not extended, we could see tariff rates on major trading partners surge once again. Regardless, the reality is that global tariff rates are at multi-decade highs and it’s still uncertain how that will impact the economy in the months ahead (so risks of a tariff-induced slowdown or rise of stagflation can’t be dismissed).

Turning to geopolitics, while the various conflicts have not negatively impacted global markets, risks remain elevated. If Iran takes steps to disrupt global oil production or transit, that will boost oil prices and create a new headwind on markets. Similarly, if these isolated conflicts begin to spread into larger regional conflicts that will also lift oil prices and weigh on stocks and bonds.

Finally, investors expect two interest rate cuts in the US, and at least three in Australia between now and year-end; however, the unknown impact from tariffs on economic growth and inflation make rate cuts in 2025 far from certain. If central banks do not cut rates in the coming months, that will increase concerns about an eventual economic slowdown and that could weigh on markets.

Bottom line, markets have been impressively resilient so far this year, but as we start FY26 there remain numerous, potentially significant risks and we will not let the market’s resilience create a sense of complacency.

To that point, at Market Partners, we remain committed to helping you effectively navigate this investment environment.