Market Update – March 2025

TWD February 2025 Commentary

Macro Commentary

After a strong January, the S&P/ASX 200 fell by -3.8% in February as a broad sell-off in risk assets, driven by weaker than anticipated earnings results and heightened macroeconomic certainty took hold. Across the sectors, Utilities (+2.7%) and Consumer Staples (+1.45%) were the only sectors with positive returns while IT (-12.3%) and Healthcare (-7.7%) were the worst performing sectors as valuation multiples contracted amid a slowdown in earnings growth. 

Around 65% of the 142 companies in the S&P/ASX 200 reporting during the period met or exceeded analyst estimates. This is a commendable outcome amid the ongoing theme of rising revenues and falling earnings we have experienced since mid-2022. Notable results during the period included:

Hub24 (HUB) – The wealth platform provider has seen exceptional growth in Funds Under Administration (FUA) over the last several reporting periods as investments in its technology platform pay off, with earnings having grown at 51% p.a. since 1HFY20, this has driven share price gains of nearly 600% since December 2019.
Qantas (QAN) – The national carrier reported a strong half year result, with revenues growing by 9% and earnings growing by 16% year-on-year and, the company also announced a $400 million dividend, its first in 6 years.
Wisetech (WTC) – The logistics software developer plunged 27.7% during February as long-reported governance issues culminated in all non-executive directors on the board resigning and the company releasing a weaker-than-anticipated result with lower revenue growth.

Overall, companies that successfully managed cost pressures and maintained strong balance sheets fared well during this tricky earnings season, while those with weak governance or who are more exposed to economic cycles have struggled. With banks and iron ore miners, the two largest sectors in the index with an approximately 50% weight, under pressure, broad passive exposure carries increased risks. This makes an active approach to stock selection and sector allocations more critical than ever.

Australian inflation continued to moderate, with Q4 2024 trimmed-mean CPI slowing to 3.2% YoY, the lowest in years and nearing the RBA’s 2–3% target. This disinflationary data paved the way for the RBA to cut rates by 25bps to 4.10% in February—its first cut since 2020, something that was well anticipated by the market. However, officials remained cautious on further easing, citing persistent labour market tightness, which can drive wage growth and keep inflation elevated. We observe that much of this tightness has been driven by public-sector employment, particularly in healthcare and social services. If fiscal spending is curtailed amid heightened scrutiny ahead of the election, labour demand may ease, reducing wage pressures and strengthening the case for further RBA rate cuts later in 2025.

In the US, the S&P 500 fell -1.3% in USD terms as mixed earnings from large-cap tech overshadowed strong results from smaller firms. Earnings have been broadly strong, with 75% of companies reporting earnings above estimates, in line with the historical average of 77%. A key topic discussed during the season has been Capital Expenditures (capex) among the Magnificent Seven stocks. Microsoft, Amazon, and Alphabet, plan to invest c.US$325bn in capex this year alone, largely in AI infrastructure. While these investments signal confidence in AI’s potential, cost-cutting in AI model training has sparked investor caution, leading to share price declines. The market remains wary of the returns on heavy AI spending, though the shift underscores tech firms’ commitment to maintaining a competitive edge in AI-driven services.

Data in the US has been mixed as the impact of the wide-ranging policy changes by the new Trump administration start to work their way through macroeconomic indicators. Inflation data has generally shown signs of continued disinflation across categories while measures of consumer spending have tailed off. US personal spending data, released at the same time as January’s PCE numbers unexpectedly contracted during the month of January, as inflation-adjusted spending fell by -0.5%, the biggest monthly decline in four years. It remains to be seen whether this fall in spending is due to poor weather in the US keeping consumers home, or a broader trend in the slowing of spending.

Looking forward, the outcome of Donald Trump and the Republican Party’s attempt to reorganise the US position as a net importer of goods will have far reaching consequences for markets. On the margin, it will be a net positive for US equities as lowered competition from imported goods and possible tax cuts will improve corporate earnings. In Australia, lower borrowing costs should ease financial pressures, particularly for companies with debt on their balance sheet, while also supporting household spending and broader economic activity. We continue to see reasonable prospects for at least two more rate cuts in 2025, which is good news for domestic CEOs.

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