The Australian sharemarket finished slightly higher across the week, as it eked out a less than 0.1% gain. However, sector performance was mixed, as Financials (+0.5%) and Information Technology (+2.7%) lead the indices, while Energy (-4.5%) detracted from performance. Business and consumer confidence surveys stayed subdued, with households still pressured by cost-of-living strains. Overall investor sentiment appears sensitive to inflation, global growth risks, and interest-rate expectations, especially with the RBA under pressure to assess how much labour market softness justifies easing.
US sharemarkets ended higher, led by the NASDAQ as the major technology providers outperformed. Gains were supported by strength in Utilities (+2.4%), Energy (+1.6%), Financials (+1.3%) and Consumer Discretionary (+1.3%). Treasuries firmed and gold rose nearly 1%, while oil edged higher despite OPEC+ boosting output. Markets have almost fully priced in a 0.25% rate cut by the Federal Reserve in the US next week, and are expecting further easing towards the year-end due to signs of labor market weakness. Jobless claims climbed to the highest since 2021, while CPI and PPI data came in mixed. Optimism around Artificial Intelligence remained a key driver, though trade tensions and political noise added to uncertainty.
European sharemarkets ended higher, with the STOXX Europe 600 up 1.0%, despite political uncertainty in France. The European Central Bank held rates steady at 2%, however struck a dovish tone, while the major banks now see December as the earliest chance for easing. UK GDP stalled in July as manufacturing contracted, raising concerns about the sustainability of growth. The Financials sector (+4.1%) was the best performer, closely followed by Materials (+2.6%), while Travel & Leisure (-0.6%) and Telecommunications (-1.1%) weighed on the indices.
Still Exceptional? The US vs. the Rest of the World
There’s been a lot of talk this year about whether it’s time for investors to reduce exposure to the US. With political uncertainty, rising debt levels and market volatility, the idea of “US exceptionalism” has come under scrutiny.
But while the headlines may have shifted, the fundamentals haven’t changed all that much.
Our view
Over the past few decades, differences in regional market performance has mostly come down to earnings growth. Valuations alone haven’t been a reliable guide when deciding where to allocate capital. We still think the US’ earnings growth will be strong relative to the rest of the world, particularly in the technology and financial sectors.
As a result, we continue to see the US as the largest and core part of any global portfolio. The recent move into other markets, particularly Europe, has been more tactical than structural. The US will remain core as it still benefits from a deep capital market system, a culture of innovation and higher productivity levels than many of its peers. Additionally, the US remains the centre of global financial liquidity. While there’s growing interest in reducing dependence on the US Dollar, any shift away from it will take time, coordination and likely won’t happen quickly or cleanly.
So why diversify now?
That’s not to say there aren’t reasons to temper one’s US exposure. Exceptionalism, after all, doesn’t mean perfection.
In our portfolios, we trimmed select US names (such as Workday and D.R. Horton), not because we’ve lost faith in the market, but to make room for compelling opportunities elsewhere. European markets, for example, offer selective growth opportunities, especially in sectors benefitting from changing political and security priorities.
The European defence and infrastructure theme is one we’ve leaned into. With Europe waking up to years of underinvestment in these areas, we’ve added exposure to companies like Airbus, Siemens Energy, and SAP. These are global names tapping into regional urgency, capital flows into the region and longer-term fiscal commitments.
Still, the broader macro picture in Europe remains lacklustre. UK inflation remains stubbornly high, German GDP recently underwhelmed and consumer sentiment across the Eurozone is tepid. These issues have led to expedited interest rate cutting cycles from the Bank of England (BOE) and European Central Bank (ECB). They’re cutting out of weakness, not strength. While the ECB held its cash rate unchanged at 2.00% last week, it has cut deposit rates four times this year, down from 3.00%.
What this means for investors
From our perspective, the recent challenges to US exceptionalism are more cyclical than structural. For long-term investors, the US remains a cornerstone of global equity exposure. But that doesn’t mean caution isn’t warranted. We remain acutely aware of the US debt situation and will be keeping an eye on how it is addressed. That being said, we allocate capital to the best companies and at this stage most of them are still in the US. However, that doesn’t mean other markets should not be ignored. There are small pockets of opportunity out there, you just have to be selective. At this stage though, the US still wears the crown.
Another quiet week of news domestically, as the Unemployment Rate will be released, with consensus for it to hold steady at 4.2%.
Overseas, Retail Sales will be announced in China and the US, the Unemployment Rate and Consumer Price Index will be released in the UK, along with interest rate decisions for both the US and the UK.