Crispin Murray: What’s driving the ASX this week?

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

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FALLING bond yields, decent earnings from Nvidia and a US court ruling against some of the Trump Administration’s tariffs combined to support equity markets last week.

The latter ruling is under appeal and tariffs will remain in place through that process. However, there is a perception that this may reduce the Trump Administration’s bargaining power and possibly lead to a lower tariff outcome.

There are other mechanisms for applying tariffs (detailed later in this note), so this process is unlikely to make a major difference to the ultimate tariff rate, in our view. The key issue remains whether we see negotiated outcomes that help reduce the end tariff rate.

The rally in bonds diffused some of the concerns that the rise in long-dated bond yields would derail equity markets.

At the same time, Nvidia’s outlook was constructive, and underpinned the recovery in AI and technology stocks last week.

The S&P 500 rose 1.9% and finished up 6.3% for May. The ASX 300 was up 0.9% and 4.2%, respectively. Both markets are now up over the year: 1.1% for the S&P 500 and 4.9% for the ASX 300.

Growth stocks, some domestic cyclicals and a recovery in the energy sector helped Australian equities last week.

Impact of the tariff ruling

Our first observation is that the timing of the US Court of International Trade (CIT) ruling caught the market by surprise – it was not expected this soon.

The second observation is that the CIT, while not well known, is held in high regard by legal experts, with a specific remit and technical framework and specialised jurisdiction over civil disputes related to US customs and international trade laws.

It found no legal defence for the Trump Administration’s implementation of the 10% reciprocal tariffs – and those levied on Mexico, Canada and China with regard to fentanyl and border security – under the International Emergency Economic Powers Act (IEEPA). The Court issued a permanent injunction blocking enforcement of the tariffs.

The government immediately appealed the decision and the US Court of Appeals ruled that the tariffs could remain in place while that process plays out.

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The legal consensus is leaning to the view that the Appeal court will uphold the CIT ruling, which would then see the matter go to the Supreme Court, which may not rule until after their summer recess.

In reviewing this matter, the Supreme Court will be mindful that over-ruling the CIT could call previous rulings and cases relating to intellectual property and other matters into question, prompting further consequences.

Also, when the Supreme Court ruled on upholding the TikTok ban in January, it cited two previous IEEPA cases which emphasised that the President can’t assert authority on the basis of national emergencies that aren’t genuine and extraordinary – and that the impact of the remedy must be proportional to the threat.

So, there is a reasonable chance this may prevent the Trump Administration from using the IEEPA path. However, there are other paths that the Administration can take:

1. While the Appeal is pending, these tariffs can remain in place.
2. If suspended, then the President has authority to impose tariffs up to 15% for 150 days to address trade deficits, under section 122 of the Trade Act of 1974. This could be applied within days/weeks.
3. The Administration could launch investigations to lay groundwork for new permanent tariffs under Sections 232 and 301 of the same Act. While more time consuming, they can be expedited and probably undertaken during the 150-day period while Section 122 tariffs are in place.
4. There is an existing Section 301 tariff already in place on China, which can be used to increase tariffs.

So, while the CIT ruling notionally takes average tariff rates down from 14% to 6%, at this point we would still work on the premise that tariffs end up in the 14 to 18% range.

The other issue to watch is the bilateral negotiations between the US and other countries. Treasury Secretary Bessent noted that two are close to agreement and that two more are proceeding but are more complicated.

So, we could find that the bulk of trade is covered off by bilateral deals by the time the legal process is over.

There was further negative news over the weekend, as President Trump announced that steel and aluminium tariffs would be raised from 25% to 50%.

It is unclear if this will be followed through; this may be Trump trying to re-assert his credentials in response to the surge in TACO (“Trump Always Chickens Out”) memes.

We also note a deterioration in the tone of discussions between China and the US, with both sides accusing the other of breaking the spirit of the recent Geneva agreement.

The upshot, in our view, is that tariffs are an important part of the Trump Administration’s five-pronged strategy to re-industrialise the US economy – the other four being tax cuts, deregulation, cheap energy and a lower US dollar.

As a result, we should assume they find a way to apply them.

However, there is a risk that the legal wrangling weakens their bargaining position and delays the signing of bilateral trade deals.

“Big beautiful” budget bill process

There was nothing much new last week. As the bill marinates, there is an increasing sense that Congress will look to roll back some of the measures given the concerns over the fiscal deficit.

This could make it harder to reach final approval, which may mean it is not in place by mid-August when the debt ceiling needs to be lifted.

As it stands, the Bill does front-end stimulus measures – such as a US$4k tax breaks for retirees, no tax on tips, and increased tax credits and a baby bonus for people having children.

These would kick in around April next year and Goldman Sachs estimates this could add 1% to GDP in H1 2026.

This would coincide with the German fiscal stimulus, and potentially affects the duration and scale of the current monetary easing cycle.

Growth and inflation outlook

The Core Personal Consumption Expenditures (PCE) deflator – a measure of inflation – was helpful, coming in at 0.12% for April which was in line with consensus. It was 2.5% year-on-year, with services inflation decelerating.

This is likely to be the low point in inflation, however, with the spike from tariffs set to hit from late May through to October. Annualised inflation over those months may reach 6%.

In this case, the PCE could rise to 3.5% year-on-year by the end of 2025, versus a Fed target of 2%.

That said, this is a wildcard given no one knows how large the tariffs will ultimately be – and how much of the impact companies will pass through.

It is important to remember that this is a one-off impact – and the Fed has historically said it does not see tax-driven inflationary impulses as a reason to react as it is transitory.

Given greater slack in the labour market, there is less reason to expect this to trigger an inflation spiral.

There are also offsetting factors with the hit to GDP later this year – estimated to be from 1.0% to 1.5% – leading to slower services inflation, offsetting the traded goods inflation.

Elsewhere, real disposable income rose 0.7% in April after rising 0.5% in March, highlighting that there is still good support for consumers. The savings rate has risen from 4.3% to 4.9%, reflecting a more muted rise in consumption in April (up 0.1% month-on-month).

The conclusion is that the US consumer remains in decent shape to absorb the impact of tariffs.

The Atlanta Fed GDPNow is signalling Q2 2025 growth of 3.8% and we are now seeing Wall Street beginning to follow; JP Morgan lifted its forecast to 4% – a lot of this is the unwind of the negative trade impact of Q1.

The average growth for H1 2025 will therefore come in at around 2%, which is probably the right signal for the run-rate going into the tariff shock and which should pull growth down to around 1% by Q4.

The most important read on the US economy is jobs as this drives income. Interestingly, it is also important for the equities market, with the strength of 401K inflows providing important liquidity.

There is a small sign of deterioration here as continuing claims are ticking up and have hit a cycle high. Payroll data is out this Friday.

Markets

The US market reacted well to the Nvidia result, which saw revenues up 12% quarter-on-quarter, beating consensus by 2%.

The important message was that shipments are picking up as supply chain constraints ease and demand remains good, which will help drive gross margin expansion.

It suggests there are no signs of weakness in the market for its graphic processing unit (CPU) chips, reinforcing the message from data centre hyperscalers (the largest users of data centre capacity such as Amazon, Microsoft and Google, among others) that capex is holding up.

There is also more focus now on the application layer for AI – for example, AI assistants on mobile phones – which will provide more confidence that the investment being undertaken can begin to be monetised.

This completes the earnings season for the Mag 7, which has proven to be one of the best in terms of revisions.

This, combined with a large underweight in tech among US hedge and long-only funds, helps explain why the market has been supported by the tech sector.

Australia

The S&P/ASX 300 returned 4.2% in May, driven by Technology (+18.8%).

Energy (+8.7%) and Small Resources (+10.1%) also outperformed on reduced concern over the risk of recession. Financials (+5.1%) did well, driven more by the insurers and market sensitives rather than the banks.

Defensive sectors such as Utilities (+0.3%) and Consumer Staples (+1.2%) lagged, having done well in April, while Health Care (+1.4%) was also weak on lingering concern over tariffs.

Large-cap Resources (+3.1%) also underperformed, with the outlook for iron ore seen as more subdued.

May also saw a mini-reporting season, which went reasonably well.

Results from Life360 (360, +51.9%) and Technology One (TNE, +36.8%) led the market higher, while the rest of the tech sector followed the US lead – with WiseTech (WTC) +21.1% and Xero (XRO) +12.2% on a good result.

Domestic cyclicals such as Qantas (QAN, +19.9%), Nine Entertainment (NEC, +12.9%) and Seek (SEK, +14.1%) also outperformed, helped by the RBA’s 25bps interest rate cut and its positive signalling on future cuts, as well as Labor’s election win which underpins government spending.

Industrials generally did better – notably Dyno Nobel (DNL, +18.1%) and Orica (ORI, +15.7%) on decent results supported by capital management.

Banks (+4.4%) were in line with benchmark, but this hid a more material divergence – with Commonwealth Bank (CBA) +5.6% and National Australia Bank (NAB) +5.2%, while ANZ (ANZ) was -2.8% and Westpac (WBC) was -0.9%.

Aggregate bank valuations remain at extreme levels, with the sector trading at almost four standard deviations above long-term price-to-earnings (P/E) and price-to-pre-provision-profit levels.

However, the bulk of this is now the CBA premium over the rest of the big four banks – this has reached record levels at 13 P/E points (23x versus 15x for the other “Big Three”) and is the best representation of the distorting effects of index weights.

Overall, the S&P/ASX 200 has returned to the top end of its historical valuation band at around 18x, which limits the valuation-driven upside from here and means the market will be earnings driven.

The positive here is that FY26 earnings-per-share growth is currently expected to be 6.9%, with resources finally no longer being a headwind.

The current valuation rating does make the market vulnerable to a deterioration in earnings. This looks unlikely in the next few months, however, given the solid economic outlook and supportive fiscal and monetary policy.

Inflation this month was broadly in line with expectations, while retail sales was a bit soft (-0.1% month-on-month, possibly tied to the election) which helps underpin expectations for RBA cuts.

The July meeting remains live for a cut, with the market at 60% probability, with two more cuts expected by year end.

About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

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

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