Markets – February 2025

Tech sector sell-off capital was redeployed into other sectors

While global stock markets recovered following the DeepSeek sell-off, most tech stocks, including Alphabet, Microsoft, and Tesla, did not. Investors continued to rotate out of high-growth tech/AI stocks as they sought value opportunities in other sectors. 

This rotation benefited non-tech sectors, including the energy (oil and gas), materials (hard commodities), and real estate (office and commercial property) sectors, which all performed strongly over the month. 

The era of US equity outperformance may be ending

Global investors finally appear to be doubting the wisdom of keeping all their eggs in one basket. A decade of exceptional US investment returns may be cresting just as Donald Trump’s “America First” programme returns to Washington.

Trillions of dollars of capital have flooded US markets in recent years. However, stretched valuation gaps and the radical upheavals of Trump’s new administration have caused some of this to start reversing barely over a month into his tenure. 

Multiple narratives are now unfolding to explain this switch and counter the long-held fixture of US investment “exceptionalism”.

The most obvious of these is lifting gloom in Europe, a major source of the investment flows that have pushed US markets ever higher in recent years.

Catalysts for the rethink include a forced retooling of Europe’s defence sector, the prospect of ending the Ukraine war, a potential economic recovery in China, and hopes of looser fiscal policy in Germany after this weekend’s election.

Reporting season provided little outlook for the year ahead

We are just over halfway through the Australian corporate reporting season, and the results to date have been reasonably mundane. Some companies produced better-than-expected earnings, some reported disappointing earnings, and the rest delivered right on target. 

There was a clear lack of significant outlook statements for the year ahead, with most companies cautious about the outlook. 

One of the most notable areas of caution for management teams is the uncertainty surrounding US policy announcements on trade, tariffs, and geopolitics. This will mean that investment decisions will be put on hold until the global trade environment is clearer. 

When you’re priced for perfection, you need to deliver earnings growth

With share markets trading at record highs, several large-cap Australian stocks have risen to stretched valuations. For example, CBA shares increased by over 40% over 2024. Its earnings for the last six months were up 2% from last year, and the dividend increased by 5%. 

It is difficult to determine how this earnings increase can justify a 40% share price increase. No wonder most analysts have a sell on the stock. Usually, a 40% increase in the share price requires support by a rise of over 20% in earnings. 

Unsurprisingly, all bank stocks have been sold off this week, with NAB down by 7% and Bendigo Bank down by 14%, following disappointing earnings updates. 

Australia catches up with the rest of the world by cutting rates

This week’s interest rate cut was no surprise – 90% of economists predicted it! 

Over the last couple of months, it has become clear that activity levels in the private sector have been slowing, with some economists suggesting that the private sector in Australia has entered a recession. Recent increases in GDP have been entirely driven by public sector activity. 

Many businesses will welcome this week’s interest rate cut, expecting it to be the first of several for 2025. With December retail sales disappointing, home building at a standstill, and business sentiment indicating a sluggish outlook, the economy needs some stimulus. Now that we have commenced an interest rate-cutting cycle, that stimulus may have arrived.