In his latest quarterly outlook – for the December 2025 quarter – Tim Toohey, head of macro and strategy at Yarra Capital Management, paints a world where extraordinary policy stimulus, not economic strength, continues to underpin asset prices. Despite political turbulence in the United States – including a government shutdown, suspended data releases and the imposition of tariffs as high as 200 per cent on pharmaceuticals – global equity markets have climbed to record highs, with unprofitable growth companies joining Big Tech in the rally, and resources stocks attracting renewed interest on the back of a surging gold price and expansive fiscal and monetary frameworks around much of the developed world that support a switch back into resources.
Toohey argues that the rally’s foundations lie less in optimism and more in the spillover effects of aggressive global monetary and fiscal easing. “Regardless of what you think about Trump’s policies,” he says, “they have induced far greater easing outside the US than otherwise would have been the case.”
To illustrate the point, Toohey notes that there have already been 168 interest rate cuts globally in this cycle – the third-largest easing wave since the early 1990s. While that number remains below the pandemic-era record of 196 cuts, he believes the current cycle is far from complete. The combination of fiscal expansion, boosted military spending and loose financial conditions has created a potent, if uneasy, cocktail for risk assets.
“It seems a rather cynical reason to buy equities,” Toohey observes, “but perhaps the simple addition of all this stimulus is all that really matters – and the rest is being treated as noise.”
Still, beneath the surface of buoyant markets lies a more fragile reality. Much of the recent US growth surprise, Toohey notes, stems from consumption – particularly among higher-income households – even as real income growth stalls and savings remain low. With tariff-driven price pressures still building and business investment slowing, he expects activity to “slow sharply again in Q4.”
That dynamic, he warns, will test whether risk assets can continue to reward easing in an environment of weakening growth, a fragile labour market and stubborn inflation.
One underappreciated feature of the current cycle, Toohey explains, is the structural shift in household balance sheets. US liquid assets are now roughly equal to total household liabilities – a stark contrast to two decades ago, when debt heavily outweighed savings. This means monetary policy now operates differently. Lower rates, instead of boosting spending through cheaper credit, may simply push more cash into equities and crypto as deposit returns fall.
In such a world, Toohey argues, monetary policy becomes wealth-driven rather than cashflow-driven – dependent on asset prices rising enough to sustain confidence and consumption. “If lower interest rates merely see cashed-up households swap deposits for riskier assets,” he notes, “then much of our understanding of monetary transmission comes into question.”
The result may be a “late-cycle melt-up” in equities and alternatives, fuelled by investors chasing returns amid ultra-loose conditions and declining bond appeal. Financial markets, he observes, “have been doing the easing work for the Fed,” with US and Australian financial conditions now far looser than policymakers’ rhetoric might suggest.
That may, paradoxically, limit the scope for further near-term Fed cuts. With hiring slowing but layoffs still contained, Toohey expects the Federal Reserve to tread carefully – and warns that markets could be disappointed by a less dovish stance than futures currently imply. “A modest drawdown in risk assets remains likely in Q4,” he says, “especially given how loose conditions have become.”
Turning to Australia, Toohey’s outlook is notably more optimistic. “Encouragingly, much of our central view has been playing out,” he says, pointing to strong consumer spending, solid housing construction and a gradual rotation from public to private-sector growth.
Financial conditions have eased to neutral levels, consistent with trend growth over the next 12–18 months. While the Reserve Bank of Australia (RBA) has paused its easing bias following a mild inflation surprise in the September quarter, Toohey believes the next rate cut will likely arrive in May 2026 rather than November 2025.
A November rate cut is possible, but he thinks the onus is clearly on the inflation, employment and activity data to surprise materially on the downside in coming weeks – which seems a little less likely given the information at hand.
The recent uptick in monthly CPI, Toohey says, largely reflects base effects and the removal of household energy subsidies rather than genuine price pressure. “It’s convenient for the RBA to pause and assess whether policy is having its desired effect,” he notes, adding that the central bank’s internal conference revealed an increasing focus on the concept of a ‘fiscal R-star’ – a notional fiscal stance consistent with neutral monetary settings.
Toohey highlights that while the RBA has quietly lowered its estimate of the neutral rate, governments’ ongoing fiscal activism may be preventing a sustainable decline. However, Australia’s materially stronger fiscal position than its peer group and its resource exposure mean this issue is less pressing domestically than abroad.
Despite global uncertainty, Toohey remains constructive on Australia’s medium-term outlook. As the public-sector retreats as growth driver and productivity rises, he expects inflation pressures to ease naturally, paving the way for a gradual easing cycle from mid-2026.
“We still have three rate cuts embedded in our forecast for 2026,” he writes, “which should help sustain the pace of Australia’s economic recovery and provide a supportive environment for active investors.”
The third quarter largely played out as Toohey anticipated – with Australian small and micro-caps outperforming, a pause in the ‘steepener’ trade (that is, trades based on the yield curve steepening), and the Aussie dollar grinding higher. He expects similar dynamics to continue into the December quarter, albeit with bouts of volatility.
The key takeaway from Toohey’s outlook is that the global economy remains deeply policy-dependent. Central banks and governments are once again the engines of growth, even as the real economy shows signs of fatigue. The irony, he suggests, is that markets may now need ever-rising wealth effects just to maintain stability.
In a world where stimulus drives sentiment and monetary transmission hinges on asset prices, the line between economic resilience and financial distortion has rarely been thinner.
“Perhaps,” Toohey concludes, “this is simply what a late-cycle world looks like – one where policy, not productivity, is doing all the heavy lifting.”