Rudi’s View: Awaiting The Real World Ramifications (continued)

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By Rudi Filapek-Vandyck, Editor

Holding out a proverbial carrot in front of global financial markets is a highly effective strategy.

It worked for the first Trump administration, as it has worked on many other occasions too. After we all digested the shock of an all-out tariff attack on global trade, markets can now bask in the positive news flow towards a less trade-restrained environment for the US economy and its many trade relations.

The most visible consequence is that equity indices are either at or near their all-time record high, or quickly recapturing most of the ‘correction’ that followed upon the first tariffs shock.

In Australia, the ASX200 is back into positive territory year-to-date, led by defensive segments and with energy, healthcare and small caps as notable laggards. Shares in Wesfarmers ((WES)) and Hub24 ((HUB)) are both setting new all-time highs, both coincidentally around $80.

If we didn’t know any better, we might conclude the outlook for markets has now been de-risked, but that might prove too simplistically optimistic, even though recent news flow has surprised to the upside, and this includes corporate updates both domestically and in the USA.

Profits In The USA

Without getting too deeply into the finer details, but the current quarterly results season in the US has, overall, supported the strong bounce in share prices.

Doom scenarios and bearish forecasts aside, corporate America has clearly not been torpedoed by White House antics and the world’s largest megacaps have mostly surprised to the upside, including through confidence and ongoing investments into GenAI.

Equally important though, most positive outcomes are situated in Growth and AI-levered segments, with smaller cap companies noticeably revealing more risk and disappointments.

No surprise thus when market strategists at Citi declare their ongoing preference for Growth and large caps, as these are the defensives with positive momentum and ongoing upside potential in 2025.

Profits In Australia

In Australia, the picture looks similar, but different.

Institutional investors do have a preference for larger cap exposures. Growth stocks such as Pro Medicus ((PME)), WiseTech Global ((WTC)), Xero ((XRO)) and TechnologyOne ((TNE)) have equally quickly recaptured positive momentum, even as WiseTech management issued a cautionary note about the quarters ahead.

The same observation can be made for the likes of Life360 ((360)), Megaport ((MP1)), Netwealth Group ((NWL)), and REA Group ((REA)), though not for the likes of IDP Education ((IEL)), Readytech Holdings ((RDY)), Serko ((SKO)), or SiteMinder ((SDR)).

Local AI-beneficiaries have equally sprung to life again, also helped by a re-assuring fresh mega-contract announcement by data centres operator NextDC ((NXT)).

Share prices of Infratil ((IFT)), DigiCo Infrastructure REIT ((DGT)), Goodman Group ((GDG)) and Macquarie Technology ((MAQ)) have equally experienced renewed buyers’ interest, though all are still well off from price levels witnessed earlier in the year.

As any experienced veteran investor will confirm, smaller cap companies not supported by a megatrend such as data centres represent a higher risk proposition when stubborn inflation, tariffs and slowing growth dominate the outlook.

Australian portfolios have had their share of profit warnings already, but it’s only fair to say the general picture hasn’t been all negative in recent weeks.

On Monday, as I am writing Weekly Insights, Dyno Nobel ((DNL)), previously known as Incitec Pivot, has managed to outperform market expectations with an interim performance that has gone backwards from last year, but by less than most forecasters had penciled in. Its share price is thus being rewarded on the day.

Dyno Nobel’s ‘outperformance’ follows in the footsteps of Orica ((ORI)), Kelsian Group ((KLS)) and Maas Group Holdings ((MGH)); all companies that had been in the sin bin and previously ignored, but a better-than-feared operational performance has re-invigorated the share price.

Irrespectively, there’s no denying Australian investors have already seen plenty of profit warnings and operational disappointments in recent weeks, and it’s probably best to expect more of the same for the weeks ahead.

The travel industry is clearly feeling the pain, with each of Flight Centre ((FLT)), Corporate Travel ((CTD)) and Helloworld Travel ((HLO)) issuing profit warnings, but there have equally been signals from companies including Amcor ((AMC)), Aurizon Holdings ((AZJ)), James Hardie ((JHX)), Judo Bank ((JDO)), Reliance Worldwide ((RWC)), Sigma Healthcare ((SIG)) and WiseTech Global that pressure is real and tangible, and building.

Similar to observations made throughout the February results season: on average, smaller cap companies receive a much larger punishment than their larger cap peers, for which the share price in some cases hardly experiences a downward blip.

Signs Of Divergences

Apart from positive negotiations (apparently) between the US and China, the question remains whether corporate performances can remain a positive, market-supporting factor.

Let’s just say there are plenty of sceptics around.

For starters, economic data and most corporate updates are not yet reflective of the full impact of US import tariffs as well as the uncertainty they create.

Hence why some market watchers are already putting the onus on the next quarterly result season in the US. That might prove a more accurate and timely litmus test.

In the meantime, while earnings forecasts for American companies have stabilised, they are still trending downwards nevertheless and analysts at RBC Capital have observed an underlying trend of pushing out capex intentions and delaying investment decisions.

The larger cap companies are continuing to spend, but this is mostly AI-driven, and not representative of the broad corporate sector generally. In response to heightened uncertainty, more companies are now limiting their outlook to the one quarter ahead.

Also, as one institutional commentator opined this week: “Even if tariffs on China are dialed back to 50-60% that would still represent the largest tax increase since the 1960s (tariffs are effectively a tax).

“The second challenge is that the Federal Reserve is unlikely to ease the policy rate in the near term.”

UBS Is Positive, And Worried

Analysts at UBS have taken their concerns to the global stage, highlighting a decline in global GDP by -1% normally translates into a weakening of global profits by some -5%. The latter number grows larger for countries where domestic demand weakens too.

To retain a positive pulse in global corporate profits, GDP growth needs to remain above 0.3%.

UBS has a constructive view for US and global equities between now and year-end, projecting some 8% return potential, but is worried about what might happen in the months ahead when the impact from tariffs and uncertainty will start showing up in economic data, indicators and corporate performances.

The US economy is not expected to experience a recession (negative growth) but a projected 0.5% GDP growth still suggests a significant slowing from the 2.4% recorded in the final quarter of 2024. The first quarter saw growth decline by -0.3% but those numbers have been distorted by corporate anticipation of tariffs through advance imports, so that outcome is not representative.

UBS is modeling a Moderate Tariffs scenario which suggests EPS growth globally of 5% and 3% for corporate America (S&P500). Currently, consensus is set for 9% growth for both, suggesting what other market watchers have been flagging too: markets look ‘expensively’ priced on earnings forecasts that look too high.

That Moderate scenario assumes 60% tariffs on China and 10% universally and for certain sectorial tariffs.

Not A Lay Down Misere

One offsetting factor is institutional investors are believed to still hold above-average levels in cash, having largely not participated in the strong recovery off April lows.

Factor number two is central banks, including the Federal Reserve and the RBA domestically, are still projected to lower interest rates, which could cushion economic impact and re-stimulate economic activity.

A resounding Labor majority in the 47th Australian parliament should also bode well as policies regarding medicare, childcare services, housing and utilities bill relief are more likely to sail through parliament, and quicker.

Meanwhile, the public discussion whether equity indices might revisit the lows recorded in early April continues unabated.

Macquarie suggests the lows will be seen again. UBS would be surprised it that happens. Goldman Sachs in the US keeps referring to bear market rallies, also suggesting investors better keep their eyes peeled on the downside potential.

Says the global strategy team: “The recent rally in equities and Cyclicals versus Defensives, and a decline in equity risk premium, seem incompatible with downside economic risks and, even if a recession is avoided, valuations remain expensive, particularly for the US market.”

A mild US recession, on Goldman Sachs’ assessment, could easily pull back US equity indices by -20%, also helped by above-average index concentration.

Strategists at Citi note the S&P500 is yet again approaching their year-end target of 5800 and they cannot see any justification for the index to sustainably rally above that level.

My personal five cents worth is the Australian share market should be able to outperform US equities on much less impact from tariffs and the prospect of RBA rate cuts, but there’s most definitely potential for markets to go through more challenging times from the moment economic data show weakness and general tariff fatigue kicks in.

Meanwhile, FNArena is keeping a close eye on what’s happening with local earnings forecasts: https://fnarena.com/index.php/2025/05/12/weekly-ratings-targets-forecast-changes-09-05-25/

Our Corporate Results Monitor: https://fnarena.com/index.php/reporting_season/

More reading: https://fnarena.com/index.php/2025/04/30/rudis-view-awaiting-the-real-world-ramifications/

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This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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(This story was written on Monday, 12th May 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

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