Market & Portfolio Update – December 2025

Market Overview and Outlook

The S&P/ASX 200 fell 3.05% over the quarter, retreating from all-time highs set in October. Beneath the headline decline, dispersion remained wide. Materials outperformed with a 12.37% return as gold rallied driven by lower real yields and USD weakness. Information Technology lagged, dropping 20.71% amid growing investor caution around AI-related capital expenditure and profitability timelines.

Domestically, the macroeconomic data was mixed. The unemployment rate eased to 4.3% in October, beating expectations after rising to 4.5% in September. Although up from the 3.4% trough in 2022, it remains below long-term averages and broadly consistent with a normalising, post-COVID labour market. By contrast, other labour-demand indicators showed softening with the Jobs and Skills Australia Internet Vacancy Index is now 32% below mid-2022 peaks, highlighting a steady decline in advertised positions. Inflation surprised on the upside, with annual CPI rising to 3.8% in October from 3.6% in September, driven by higher electricity tariffs and increases in property rates and charges. The stronger prints prompted the RBA to hold rates steady at 3.60% during the quarter, while shifting market pricing toward the next move being more likely a hike than a cut. Australian government bond yields moved higher in response to the firmer inflation data, while the AUD remained range-bound, making currency effects a modest net positive for offshore earners benefiting from a strong US dollar.

Global markets pushed higher despite a paucity of US data during the government shutdown. The S&P 500 rose 6.34% in USD terms as AI-linked spending continued to support Information Technology and Communication Services. Consumer Staples underperformed as cost-of-living pressures weighed on demand and promotional intensity returned in some categories. US inflation remained contained, but still above target, at 3.0% YoY in September, with no official CPI release available yet for October. Labour market signals showed the unemployment rate edging up to 4.4%, still low by historical standards but the highest reading since late 2021, consistent with other indicators such as Challenger layoffs and ADP payrolls which pointed to softer job growth. Credit spreads tightened early in the quarter but began to re-widen into month end as investors reassessed the growth impulse, creating a more selective backdrop for credit-sensitive equities. Japan and Europe also advanced, helped by stepped-up investment in energy, transport and defence as economies work to reduce reliance on US trade flows and security guarantees.

Trade policy remained a key source of volatility. US President Donald Trump and China’s President Xi Jinping met for the first time since the start of Trump’s second term. In the lead-up, both sides sought leverage through export controls on semiconductors and rare earths. Each claimed progress after talks, with China agreeing to resume purchases of US soybeans and the US outlining a 10% reduction in some tariffs on Chinese goods. The run-up to the meeting saw sharp moves across commodities. Gold saw a sharp intramonth spike as investors rotated into defensive assets during the trade-policy brinkmanship, before giving back some gains once negotiations stabilised and ending the quarter up 23.57%. Industrial metals were choppy as investors balanced decarbonisation-driven demand for copper and nickel against signs of slower global manufacturing.

Looking ahead, central bank policy and ongoing AI-related capital spending remain the key market drivers. In Australia, the next move is more likely to be a rate increase than a cut, while in the United States the outlook for additional easing before year end remains uncertain, with Chair Powell signalling a cautious stance. This leaves underlying economic growth and resilient corporate earnings as the primary supports for performance. In our view, diversified portfolios are well placed to balance risk and capture opportunities under this mix.

Putting it Together – Forward Strategy and Positioning

As we move into the final month of the year, markets remain driven more by shifting policy expectations than by earnings or data, but the narrative is starting to stabilise. Global fiscal expansion continues as governments prioritise defence and infrastructure spending, sustaining growth despite tariff headwinds. In the U.S., tariffs are likely to plateau at moderate levels, limiting their market impact, while AI-related capex continues to support high equity valuations. The US dollar looks set to weaken as global growth broadens, favouring international equities, particularly in Asia. In Australia, stretched valuations and fragile household demand point to weaker equity performance, even as bond markets benefit from fiscal resilience.

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