NEWS + VIEWS – 18/07/2025
MARKETS
US Federal Reserve Chair Jerome Powell has stated that interest rates are being held steady due to the size of threatened tariffs. This week’s inflation data reading ticked up but certainly did not offset concerns that tariffs will push inflation higher. President Trump duly floated the idea of sacking Powell, which pulled markets down on Wednesday. They rebounded on Thursday after the idea was ‘denied’ by Trump.
Expect more volatility as the US tariff negotiations continue. Late July to November is seasonally a more volatile period for shares.
China’s GDP growth of 5.2% exceeded expectations and suggests that it is avoiding the worst fears of the fallout from US tariffs, which is a positive for our mining exporters. On the other hand, consumer confidence in Australia remains very subdued, putting pressure on discretionary spending. The absence of an expected interest rate cut from the Reserve Bank this month wouldn’t have helped.
AUSTRALIA’S ‘MAGNIFICENT 5’
The Magnificent 7 technology stocks (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) have accounted for a considerable portion of the returns from US markets over recent years. Apart from Tesla, they have appeared to defy investing ‘gravity’.
Domestically, there has been a lot of coverage of the dramatic rise of Commonwealth Bank’s (CBA) share price over the past year or so, but there are other stocks that have also had very significant rises beyond apparent fundamentals. Simon Mawhinney from Alan Grey analysed the performance of CBA, Westpac (WBC), NAB, Goodman Group (GMG) and Wesfarmers (WES) over the past couple of years.
The chart below shows that those five stocks delivered 67.6% of the ASX 300 returns in financial year 2024 (Column D). Describing it another way, the ASX 300 returned 11.9% in that year and the five stocks mentioned contributed 8% of that total index return (column C).
In the chart below, the weighted return in 2024 (second column from the right) shows the percentage the five companies make up in the index by size was 42.2% vs 4.8% for the other 295 companies. In the 2025 financial year (far right column), the ASX 300 returned 13.7%. The top five companies again outperformed (apart from GMG) the other 295 companies with weighted returns of 32.1% and 8.11% respectively.
The results in the red box show a stark difference between investing in the index vs the Top 5 companies. However, the large outperformance has been only in the past two financial years.
Surprisingly, the earnings growth of these top five companies has underperformed those of the other 295. In that case, if it is not earnings growth driving the price rises, then what could it be?
Mawhinney points to passive index products such as exchange traded funds and superannuation funds flowing to a narrow set of large, liquid companies to ensure their performance and/or weightings align with the index or competitors. Therefore, the rises are due to ‘following the money’ rather than fundamental health of the companies.
Another factor may be institutional money exiting the US in response to the US tariff policies looking for Asian destinations that are large and liquid. Overseas institutional investors usually have a mandate requiring a set exposure to Asia (and other global markets) and see Australian large companies as a lower risk Asian option. China as an Asian destination is still being treated with caution.
These five companies are of high quality and, like the Magnificent 7, deserve a premium in their pricing. However, investors should be aware of the risks of companies where share prices have ‘got ahead’ of earnings growth.
It is difficult to see the same outsized returns continuing for the ‘Magnificent 5’ while conceding that we have thought that previously. Rather, we expect a period of earnings ‘catch up’ with subdued share prices for these companies.
Macquarie Cash Management Accounts
Macquarie Bank have informed us that from August this year, it will be removing general withdrawal authority from clients’ Cash Management Accounts (CMA) and we will only be able to process withdrawals into selected accounts (e.g. payments to the ATO).
For other withdrawals that we make on clients’ behalf, we will be able to use adviser-initiated payments, but this will require the client to approve the payment via Macquarie’s Authenticator app. Please download the app on your mobile phone as soon as possible if you have not already done so. If you need any help, please contact your adviser.
Gerard O’Shaughnessy
P 0423 771 330
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