What’s driving Aussie equities this week?

Here are the main factors driving the ASX this week,?according to analyst and portfolio manager Elise McKay

• Learn more about Pendal's Australian equities capabilities
• Read next: How equities investors should think about China’s disruptive DeepSeek AI

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MARKETS have been dominated by political news flow – with almost daily updates on tariffs, which have been used largely as negotiating tools.?

As we navigated through the tariff minefield, noisy macro data, more US earnings, as well as the start of Australian earnings, markets were relatively flat for the week.

The S&P 500 was down 0.23%, while the S&P/ASX 300 was down 0.24%.

US Treasury Secretary Bessent commented that he and President Trump are focusing on lower 10-year US bond yields and expanding energy supply to drive down inflation.

While Bessent does not control the market, this does suggest a very strong political desire to keep rates from breaking through 5% – helpful for markets!?

Robert F Kennedy Jr is another step closer to becoming the Health Secretary after clearing a key senate vote. This has meaningful risk for healthcare names given some of his controversial views on areas like vaccines.

Flows are providing a strong tailwind for the US market, with retail investors so far buying the dip in 2025. The corporate buyback window is also largely open as of last Friday.?

Hedge funds are again buying AI stocks following the DeepSeek sell off on 27 January and the “big four” hyperscaler results (Amazon, Google, Microsoft and Meta), which were broadly bullish on AI customer demand.?

We are also seeing a bullish divergence in the calendar year-to-date, with the S&P 500 up 2.6% despite Microsoft, NVIDIA?and Apple (which together make up 20% of the index) all declining 2.8%, 3.3% and 9.1%, respectively.?

This is good for both stock-pickers and the extension of the bull market.?

It was a quiet week on the macro front, with the market looking through a noisy jobs print and instead focusing on the University of Michigan Consumer Inflation Expectations Survey increasing to 4.3%.?

This spooked the market on Friday, in combination with further threats of tariffs from Trump.?

US macro and policy

Jobs

We saw a noisy jobs print on Friday, which supported the view that the US Federal Reserve should be in no hurry to cut rates at its March meeting.?

While the near-term labour market is in good shape, there is potential for some softening later this year, which should support a recommencement of the rate-cutting cycle.

January payrolls increased by a weaker-than-expected 143k (versus consensus at 175k), likely dragged down by strike action and adverse weather. There was a 100k upward revision to prior months.?

As a result, three-month average private sector job creation has accelerated to 237k, which is above the pace that should keep the unemployment rate stable.?

After peaking at 4.25% in July 2024 and sitting within a 4.1-4.2% band for the past six months, the unemployment rate fell to 4.01% in January 2025 (versus consensus at 4.1%).?

While the trend for jobs is currently accelerating and the ISM data is supportive of near-term growth, there are a few headwinds which may result in softer readings later this year:?

• Hiring indicators are muted and DOGE-led policy changes are also a headwind.
• Around 60,000 government workers (2% of the federal civilian workforce) are reported to have accepted a “deferred resignation” package effective September 2025, a program originally targeting 5-10% of the workforce.?
• Hiring freezes and headcount reduction programs at some government agencies may further weigh on upcoming job reports.

Wages

Average hourly earnings rose by 0.48% month-on-month (versus consensus at 0.3%) in January, but this appears to be affected by weather – with a decline in average hours likely triggered by some workers being unable to make it to work due to heavy snowfall.?

The quarterly Employment Cost Index (ECI) remains more important for the Fed.?

The JOLTS quits rate continues to point to weaker underlying wage growth and, therefore, softer services inflation ahead.?

ISM survey data

The Services ISM dipped from 54 to 52.8 in January, driven by weakness in new orders and business activity.?

The New Orders Index declined from 54.5 to 54.3 – a seven-month low – suggesting that worries about immigration and trade policy under Trump are overriding optimism on potential tax cuts or deregulation.?

Meanwhile the Manufacturing ISM increased to 50.9 from 49.2, its highest level since September 2022, driven by strong new orders and production.?

It is not yet clear whether this upturn is a lasting improvement or a temporary boost from purchases bought in anticipation of tariffs.?

Both ISMs saw improvement in their employment indices, reflecting near-term positivity for labor markets.??

University of Michigan Consumer Sentiment Survey

The latest survey suggests concerns about the economy and inflation are growing among consumers, with the February 2025 preliminary reading dropping from 71.1 to 67.8 – well below consensus at 71.8.

This probably reflects Trump’s threats to impose sweeping tariffs.?

The consumer expectations component (which is 60% of the index) is now running at 69.3 for 1Q25, which is consistent with year-on-year growth in consumption declining from 3.2% in 4Q to 2.0% in 1Q.?

It will be important to keep an eye on this in an environment of policy uncertainty as a lead on US consumer spending.

Somewhat concerningly, consumers’ inflation expectations increased to a 15-month high of 4.3% (from 3.3% previously).?

Tariffs

A busy week on tariffs underscored the dynamics of current trade policies and the unknown impact on the economy, as well as the purpose of tariffs as a negotiating tool versus a means to protect domestic trade.?

Over the past week, we have seen China tariffs implemented, while the initial measures on Canada and Mexico were walked back.?What we know is that this uncertainty increases volatility.?

Events in chronological order:

• 1 Feb: The US announced 25% tariff on all imports from Canada and Mexico, citing concerns over illegal immigration and drug trafficking. A further 10% tariff applied on Canadian energy exports into the US, as well as a 10% additional tariff on imports from China. All were to be effective from 4 February.
• 3 Feb: Tariff implementation delayed for Canada and Mexico for 30 days. Mexico committed to deploying 10,000 National Guard troops to guard its border.?Canada agreed to appoint a “fentanyl czar” and enhance border security measures.
• 4 Feb: The China 10% tariff was implemented. This is not expected to have a meaningful impact on aggregate prices alone, given imports are about 10% of consumer spending and China accounts for some 14% of total imports.?In retaliation, China imposed largely symbolic 10% tariffs on US crude oil, agricultural machinery and vehicles, plus a 15% tariff on coal and LNG.?China also announced export controls on rare earth metals and initiated an antitrust investigation into Google.
• 5 Feb: The US removed the “de-minimis” rule on parcels from China into the US, which previously exempted imports worth $800 and under from customs duties.?This has the effect of increasing prices for US consumers purchasing inexpensive items from China, primarily affecting e-commerce players like Temu and Shein.
• 6 Feb: The Federal Reserve Bank of Boston released a study estimating an inflationary impact of 0.5-0.8% on Personal Consumption Expenditures (PCE) from tariffs.
• 7 Feb: Trump announced plans to implement reciprocal tariffs this week to match duties that other countries (e.g. China, India, the EU, south-east Asia) have imposed on US goods.

With regard to China, the US measures and retaliation from Beijing look like the opening moves of ongoing negotiations with President Trump that seek to address structural trade issues, supply chain security and technology.

?US productivity growth

Productivity grew at a 1.2% annualised rate in 4Q 2024, in line with consensus, and 1.6% year-on-year.?This is largely consistent with the pre-Covid trend of a touch below 2%.?

It remains to be seen how the deployment of Gen-AI solutions will impact the world’s labour force and influence productivity growth.?The hope is that commercial deployment of AI will drive productivity growth over the medium term, which countries like Australia need.

AI and data centres capex goldrush continues

Results for the big four hyperscalers (Amazon, Google, Microsoft and Meta) wrapped up last week.

Their collective 2025 capex budgets have increased to US$296bn, up 13% from estimates at 31 December and 34% from estimates at 30 June last year.?

The market was initially expecting a $150-175bn capex for 2025 before Gen-AI became a thing in January 2023. ?

This suggests that the US$125-150bn uplift is purely AI, with the rest being vanilla data centres or business-as-usual capex. ??

An additional 8-10% increase is expected heading into 2026.

Capex investment as a percentage of revenues for these players has now increased to more than 20%, which is almost double its historical levels and also significantly greater than oil industry peak investment.

So, is this bubble territory or is this sustained by long-term demand??

It is too soon to tell, but commentary from Amazon, Microsoft and Google on their most recent earnings calls discussed capacity constraints in meeting customer demand for AI, underpinning their capex investments.?

Meanwhile, Trump’s US$100-500bn Stargate initiative is underway. Last week, OpenAI said it has now sent proposals to US states looking for sites to build five-to-ten 1GW+ data centres.?

Australian macro and policy

Retail sales for December 2024 were ahead of expectations, down 0.1% month-on-month (versus consensus at 0.8%) and up 4.6% year-on-year – the fastest since March 2023.?

Product discounting and Cyber Monday falling into early December were key contributors, particularly for discretionary retail.?

All eyes are on the RBA meeting next week to see if we will finally start our rating-cutting cycle.?

If so, this could signal the bottom for the Melbourne housing market, which fell another 0.4% month-on-month in January.?

UK macro and policy

The Bank of England cut rates 25 basis points (bps) to 4.5%.?

While the cut was as expected, the commentary was more dovish than expected, with two members (including the previously hawkish Catherine Mann) voting for a 50bps cut instead.?

Global markets

So far, 61% of corporates (or 72% of the S&P 500 market cap) have reported.?EPS growth has been stronger than expected in aggregate (up 12% versus 8% expected) and across the median (up 7% versus 6% expected).?

Real US GDP growth of 2.3% in 4Q24 supported a 5% increase in revenues and profit margins expanded about 50bps to 11.6%.?

Communication Services (up 29%), Financials (up 23%) and IT (up 21%) have grown the fastest, while energy declined 33%.?

We note that Goldman Sachs estimates that every 5% increase in the US tariff rate would reduce S&P 500 EPS by about 1-2%.

Earnings growth divergence between the Mag 7 and the rest of the market is converging. This is good news for extending the bull market.

• Mag 7 earnings grew 36% in 2023 and 36% in 2024 (estimated) versus -4% and 3% for the remainder of the market.
• In 2025, the consensus expects the Mag 7 to grow earnings 16% versus 9% for the rest of the market. In 2026 expectations are for 17% (Mag 7) and 13% (rest of the market).

As noted earlier, the divergence between the S&P 500 (which is up 2.6% year-to-date) and Microsoft, Nvidia and Apple is also good for both the bull market extension and stock pickers.?

Trading flows

After five straight weeks of selling, hedge funds were net buyers of US equities every day last week and at the fastest pace since early November, as single stocks saw the largest net buying in more than three years.

Info Tech was by far the most net bought sector, while Consumer Discretionary was net sold for a seventh?straight week and is by far the most net sold US sector on a year-to-date basis.

Net buying has returned to AI for eight consecutive sessions, suggesting that hedge funds have started leaning back into the AI theme post the DeepSeek sell-off on 27 January.

Gross equities exposure is very high, which is supportive for market positioning.?

Fundamental longs significantly outweigh macro shorts, so if the market sells off, those shorts will need to be covered creating demand on the way down.???

Interestingly, retail involvement in the market has reached record levels to start the year, proving that at least some one is prepared to buy the dips even if institutional investors are more cautious.?Some key stats:

• The largest retail buy imbalance (difference between buy and sell orders) in the history of the Goldman Sachs dataset (starting in 2019) took place on 17 January at $5.0bn. The second largest retail imbalance took place on Monday (3 February) at $4.9bn. Tuesday (4 February) was the fifth largest retail imbalance of $4.2bn.
• Four of the top five retail imbalances in the Goldman Sachs dataset took place in the last two weeks (i.e. buying the dip).

Approximately 60% of S&P 500 corporate buyback window is now open as of Friday until 16 March, with about $1.2 trillion of buying expected across 2025.?

Australian market

The S&P/ASX 300 was down 0.24% last week, with Resources catching up year-to date and Healthcare lagging.?Reporting season really starts picking up from this week.

Copper rallied 4.5% (up 12% CYTD) on anticipation of further China stimulus and risk of supply disruption from unrest in the Democratic Republic of Congo.?

This supported further outperformance from our precious metals names.

About Elise McKay and Pendal

Elise McKay is an investment analyst and portfolio manager in Pendal’s Aussie equities team.

She previously worked as an investment analyst for US fund manager Cartica, where she covered a variety of emerging market companies. She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426. It is general information only and is not intended to provide you with financial advice or take into account your objectives, financial situation or needs. You should consider, with a financial adviser, whether the information is suitable for your circumstances.

The views expressed in this article are the opinions of the author as at the time of writing and do not constitute a recommendation to buy, sell, or hold any security. Any views expressed are subject to change at any time.?To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.