By Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP.
The US share market experienced a decline of 1.4% over the last week, driven by persistent concerns regarding potential disruptions from artificial intelligence, excessive capital spending linked to tech developments, and high valuations within the sector. In contrast, shares in the Eurozone fell only 0.3%, while Japanese shares surged by 5% following a decisive election victory for the ruling Liberal Democratic Party (LDP). Chinese shares also saw a modest rise of 0.4%. This divergence illustrates a notable shift away from the AI and tech-heavy US market, with Australian shares gaining 2.4% as companies reported a return to profit growth after three years of downturns. Gains were primarily led by sectors such as utilities, financials, materials, and consumer staples. Bond yields fell, particularly in the US, driven by safe haven demand, while remaining flat in Japan.
The trend of rotation from technology to non-technology stocks is underscored by the performance of the equal weighted S&P 500, which is up 5.7% year-to-date, as opposed to the tech-heavy market cap weighted S&P 500, which is down 0.1%, the Nasdaq down 3%, and the so-called Magnificent Seven down 7.2%. Analysts suggest that this rotation may persist, potentially supporting overall market gains, provided that tech stocks do not face significant downward pressure.
In commodities, gold prices rose slightly, indicating potential stabilization as geopolitical tensions and erratic US policy-making elevate demand. Bitcoin remains under pressure but appears to be forming a short-term base. Conversely, oil, copper, and iron ore prices declined. The Australian dollar experienced a notable rise, briefly surpassing USD 0.71 for the first time since 2022 as the US dollar weakened.
The Australian share market has seen a promising start to the year, rising 2.3% and outperforming the US. This boost is attributed to a rebound in company earnings, particularly from miners and banks, following three years of declines. Despite a mixed earnings environment, the overall outlook is optimistic, especially if the Reserve Bank of Australia (RBA) can avoid further interest rate hikes. However, concerns about rich valuations, with a forward price-to-earnings ratio around 19.7 times, above the historical average of 15 times, persist. Additionally, the RBA has cautioned about the potential for more rate hikes if inflation continues to be a concern, while global uncertainties surrounding US policies and geopolitics remain high.
Looking ahead, the Australian dollar appears poised for additional gains, driven by a downtrend in the overvalued US dollar, robust commodity prices, and expectations for a widening interest rate differential. Analysts project the Australian dollar could reach approximately USD 0.73, which is seen as fair value.
Investors face a volatile year ahead due to geopolitical threats, including tensions regarding Iran and the implications of the upcoming US midterm elections. The risk of a 15% market correction within the next six months is significant; however, analysts remain optimistic that the overall performance of shares will be positive, bolstered by global economic growth, potential Fed rate cuts, and a turnaround in profit growth in Australia.
On the economic front, mixed signals emerged from the US last week. January job data revealed a downward revision of 862,000 payroll jobs from the previous year, echoing anticipated adjustments. However, January saw a stronger than expected rise in payrolls, increasing by 130,000, coupled with a slight decrease in unemployment rates—an indication of resilience in the jobs market. Jobless claims remain low, yet persistent inflation concerns and weak job openings raise questions about the labor market’s overall health.
Although US consumer spending is anticipated to see solid real growth in the December quarter, retail sales showed lackluster performance in December, possibly influenced by severe weather conditions. Existing home sales also fell 8.4% in January, lacking consistent recovery despite lower mortgage rates. Consumer delinquencies have increased but remain manageable, aside from student loans, which may reflect a rebound following recent debt waivers.
In the UK, the December quarter GDP rose a modest 0.1% quarter-on-quarter, reinforcing expectations for further rate cuts by the Bank of England. Meanwhile, Japan’s LDP secured a decisive electoral victory, paving the way for fiscal stimulus focused on defense spending, likely contributing to ongoing strength in Japanese equities and the yen.
As Australia enters its half-year earnings reporting season, reports indicate a consensus expectation of 11.7% earnings growth, predominantly driven by a surge in mining sector profits. However, early results exhibit a mixed response, with more companies experiencing share price declines on announcement day compared to those rising. Analysts will continue monitoring developments as additional earnings figures are released, anticipating volatility in share valuations.
In summary, while the economic landscape presents challenges, particularly within the tech sector, analysts maintain a cautiously optimistic outlook for shares, supported by strengthening profits and potential monetary easing from central banks.
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