Weekly recap
What happened in markets
The Australian sharemarket closed higher for the third straight week, adding 0.6%. Performance was choppy, as the week started higher, before falling off on Tuesday, however, rebounded in the middle of the week, before struggling again on Friday. Overall, the Health Care (-11.2%) sector was the biggest detractor, after CSL sunk 19.9%, following their weak earnings announcement and plans to spin-off its influenza vaccines unit. On the other hand, the Financials (4.2%) sector outperformed, as the big four banks all rose. National Australia Bank (8.4%) was among the highlights, after reporting lending growth, increased net interest margins and a 4% rise in revenue growth. Elsewhere, stock standout was transport and logistics company, Brambles, which advanced 11.8%, after announcing a US$400 million share buyback and beat expectations on earnings guidance.
US sharemarkets ended the week mixed, with the S&P 500 managing a modest gain, while the NASDAQ fell for the first time in three weeks. Sector winners included, Energy (3.1%) and Financials (2.2%), while the Information Technology (-1.6%) sector weighed on the indices, as Meta (-3.9%) and Microsoft (-2.5%) lead the losses. Sharemarkets were driven by shifting Fed expectations and political noise. The key catalyst was Fed Chair Powell’s recent dovish comments, which increased expectations of a September rate cut, now priced at over 90% probability of more than 50 basis points of easing expected by year-end. Earlier in the week, equities came under pressure from softer labour data, higher than expected inflation prints, along with continued geopolitical issues.
European sharemarket finished mostly higher, with the STOXX Europe 600 up 1.4% as sectors such as Automakers, Travel & Leisure, and Energy outperformed. Defensive sectors like Health Care and Consumer Staples lagged. Economic data painted a mixed picture, with manufacturing PMIs still weak but services holding up better than expected. The European Central Bank maintained a cautious tone, acknowledging softer growth momentum but stating that inflation progress remains gradual. The UK Consumer Price Index surprised to the upside at 3.8% year on year, which has reduced the probability of a Bank of England rate cut this year to under 40%. Overall, markets balanced optimism around easing central bank policy with ongoing concerns about sluggish growth and geopolitical risks.
Stock & sector movements
What caught our eye
Earnings: A Sunny Season With Some Shadows
The 2Q 2025 earnings season is wrapping up in the US and it's one worth paying attention to. Over 95% of the S&P 500 companies have reported and the numbers have been impressive. Particularly given all the macro doom and gloom. Interestingly, the number of times the word “recession” was mentioned in earnings calls with management fell significantly from 429 times in 1Q 2025 to just 67 times this quarter so far.
Meanwhile, US corporate earnings growth is tracking at +11.8%, marking a third straight quarter of double-digit gains. Plus, around 81% of reported companies have posted positive earnings and revenue surprises. But under the surface, not everything is as rosy as the headlines suggest.
Our take is that fundamentals are holding up well, but the market is demanding close to perfection for some companies. Elevated valuations and a mixed consumer outlook mean we’re staying invested, though taking care to be more selective.
AI Still Leads the Charge
Mega cap tech companies continued to steal the spotlight. The MAGMAN group, Microsoft, Apple, Google, Meta, Amazon and Nvidia, has surged by an average of +48% since April lows, compared to +25% for the S&P 500 as a whole. Their earnings growth? A stellar 27% year-on-year, outpacing the rest of the S&P 500 by a wide margin and for the tenth straight quarter.
The artificial intelligence (AI) theme remains hard to miss. Mentions of AI in earnings calls hit a record, spreading across sectors from utilities to healthcare. Meanwhile, with capex guidance rising and earnings estimates for this cohort looking strong through 2026, it's clear the market sees AI as not just hype, but rather more structural in nature.
But Caution Lurks
While the top-line numbers are solid, the market hasn’t been generous to earnings misses. Companies falling short were punished with an average -5.5% stock move, more than double the usual reaction.
The rising cost of doing business is partly to blame. Tariffs are starting to bite and interest rates remain elevated while inflation has fallen. Companies like Nike and Conagra (owner of Birds Eye) have already flagged higher costs, and smaller firms are feeling the squeeze on inputs like aluminium and components. With new tariffs coming into effect in August, we expect this issue to worsen in the second half.
Consumers: Still Spending, But Selectively
Spending trends are changing, though overall banks and credit card companies have reported healthily overall. Travel remains strong and full-service dining is beating fast casual, suggesting consumers are trading up on experiences, even as they grow more selective elsewhere. Subprime credit quality is improving slightly, but a softer labour market could test household resilience later this year.
Valuations Leave Little Room for Error
The forward P/E on the S&P 500 sits at 22.3x, above the 5 and 10-year averages. As mentioned previously, this is largely attributable to a structural shift in the market’s composition (higher margin and technology names). That being said, some valuations do look stretched and earnings growth will need to carry on from here. Analysts are expecting 10.3% earnings growth for full-year 2025, but guidance has been cautious and revisions may turn down if tariff effects are fully felt.
What this means for investors
We’re encouraged by the strength in tech and the breadth of earnings beats. Though we’re also mindful of creeping costs and a less forgiving market. For clients, this means leaning into quality, especially companies with strong pricing power, cash flow, and structural growth drivers like AI. It’s not the time to bet against the rally, but it is the time to stay focused on fundamentals and be more selective.
The week ahead
Locally, the focus will be on the monthly consumer price index, which is scheduled for Wednesday. Additionally, the RBA’s commentary from their latest August meeting will be released, providing insight into their latest 0.25% rate cut decision.
Overseas, in the US there is a raft of economic data including new home sales, consumer confidence and personal spending. More notably Gross Domestic Product for the June quarter is expected to come in at 3.1%, while the Fed’s preferred measure of inflation, the PCE price index is expected to lift to 2.9%.
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