Markets – July 2025

CBA shares continue to rise, but analysts are worried about a bubble in its share price

The Commonwealth Bank reached a record high, driven by strong demand from overseas investors. However, analysts caution that its valuation may be overstretched due to passive fund flows rather than fundamental factors.

CBA‘s share price rose by 51% over the year, whilst its earnings are expected to increase only modestly, with most analysts expecting growth in the mid-single-digit range.

This scenario leaves investors grappling with the dilemma of whether the share price gains justify the company’s underlying fundamentals. CBA shares have underperformed in July.

In the other key areas of our market, the Technology and Consumer sectors saw modest gains, while resource stocks remained under pressure due to softer commodity prices.

Recent gains in share markets have been driven by multiple expansion, not earnings growth

The ASX 200 has now rebounded by 18% from its April lows, although much of the gain is attributed to price-to-earnings (P/E) multiple expansion rather than actual earnings growth.

The forward P/E ratio for the index is now above 19 times, significantly higher than historical averages. 

The key outlook concerns coming into the new financial year are elevated share valuations and global uncertainties

While June’s performance capped off a strong quarter of recovery following the liberation day tariff fall in markets, investors should remain mindful of elevated valuations and global macroeconomic uncertainties. The upcoming earnings season will be a key test for the sustainability of current market levels.

Trump’s tariffs will hit the US economy

This week, we received the much-anticipated US CPI figures for June. This important update provides an early read on how tariffs are being passed through to consumer prices, with the caveat that the most extreme ‘liberation day’ tariffs have been delayed until August.

The figure for June showed a slight increase in inflation, but the most significant gain was in the durable goods sector (excluding vehicles), which rose by 0.8%.

Tariff pass-through is still in its early stages, but I expect the consumer impact to become more visible in the second half of 2025 as margin pressure builds.

Currently, analysts expect US inflation will peak in 2026, before gradually declining as weaker growth and diminished demand exert downward pressure.

A recent report from the Yale Budget Lab indicated US households will pay an average of US$2,400 more for goods in 2025 due to tariffs.

Investors are reverting to value stocks

After several years of value stocks underperforming, many analysts believe the time is right for them to outperform, especially given current market dynamics.

The key factors driving this outlook are:

• Interest Rate Environment
  • If central banks begin cutting interest rates, growth stocks typically benefit due to lower borrowing costs. However, value stocks—especially those with strong balance sheets and high dividend yields—thrive in a stable or slightly declining interest rate environment.
• Valuation Gaps
  • Growth stocks have seen historically high valuations, particularly in tech sectors. This has led some investors to rotate into undervalued, more stable value stocks, which are trading at attractive price-to-earnings and price-to-book ratios.
• Economic Uncertainty
  • Value stocks tend to outperform during periods of economic uncertainty or market downturns. Their steady cash flows and dividends make them more resilient compared to growth stocks, which rely heavily on future earnings.
• Sector Rotation
  • Value stocks are concentrated in sectors such as materials, healthcare, industrials, and energy—areas that may benefit from infrastructure spending, healthcare demand, and global recovery efforts.
• Early Performance
  • Value stocks have led the market in July after underperforming over the last eighteen months, suggesting a potential shift in investor sentiment and strategy.

In an uncertain economic climate, value investing offers a prudent strategy to balance risk while capitalising on long-term growth opportunities.