Crispin Murray: What’s driving markets this week

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

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LAST week was quiet on the macro front, with little data to add to the debate on disinflation and growth.

Fed speakers remain patient, as an economy holding up well allows them to wait and see if improving inflation trends are confirmed.

The US equity market was singularly focused on the Nvidia result, which once again beat consensus expectations, taking the stock – and the market – to new highs.

The S&P 500 ended up 1.68% for the week.

US earnings have been good, index momentum is strong, breadth is reasonable, the macro backdrop is supportive, and seasonality is positive – with March/April historically the best two months in 1H.

So, while consolidation is possible, the market remains in an uptrend.

The Australian market was largely flat, in a week dominated by results (S&P/ASX 300 +0.12%).

Earnings season is telling us the economy is okay; there is the odd pocket of softness, but generally, trends are continuing as before.

Industrial and tech companies are doing better, while large consumer-facing companies are wary of delivering a message which is too positive for fear of a media backlash.

Economy and inflation

United States

There was little relevant data last week.

We are seeing some survey data – such as the Evercore ISI Company Survey Diffusion index – indicate that the industrial sector is beginning to improve in the US.

This had been dragged lower by substantial destocking in 2023.

Even a gentle recovery here would help underpin economic growth.

A number of Fed members made comments during the week, generally emphasising the importance of not overreacting to January’s CPI data.

Governor Chris Waller was the most cautious, saying that the chance of January’s CPI being noise versus a signal was a fifty-fifty chance. He does tend to be at the more hawkish end of the debate. 

Vice-chair Philip Jefferson and New York Fed chief John Williams took a more benign view.

Williams noted that disinflation tends to be bumpy but is moving in the right direction, and that while core inflation is still above the 2% target, it is below 3%. He also noted there was no need to shift the view on neutral rate levels.

These comments continue to suggest a likely first cut in May or June.

Economic resilience gives the Fed capacity to be patient; it would be a tougher call if there was a weaker economy, but inflation hasn’t fallen sufficiently.

Europe

Europe also saw some marginally positive industrial survey data, as the Euro Area S&P Global and Global Composite PMIs – a measure of confidence – ticked up.

We also first signs of wage growth data easing in Europe.

China

Sentiment remains poor and authorities continue to try to support the stock market.

The National People’s Congress annual meeting in March looms large.

The market will be looking to this event to provide signals on growth targets, fiscal deficit, local government bond quota and potential central government bond issuance.

Markets

Nvidia is the bellwether for the AI theme which, in turn, is the leading theme in the market.

Its Q4 result was strong and better than expected, leading to a US$250 billion rise in market cap on the day and a current market cap of more than US$2 trillion.

The market liked several messages from management, including:

• Revenue was diversifying, implying a more sustainable earnings stream.
• The company absorbed a large hit from China, where regulation shrank its market from about 25% to mid-single digit of revenue in the quarter.
• New production innovation from late 2024, which has five to ten times the computational power and should underpin the outlook for 2025.
• Enterprise and sovereign demand are gaining share.

The spread into enterprise is particularly interesting as that goes to the use case and the potential for generative AI to accelerate productivity and earnings in other sectors.

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Overall, the US market appears to remain well underpinned as it breaks to new highs.

The percentage of stocks above their 200-day moving average has remained in the 70-80% range in 2024, which compares to a trough of near 20% in October last year. 

Sentiment is very bullish, but this is not a reason in and of itself for the market to drop.

For example, the market stayed near current levels of bullishness – as measured by the Consensus Inc % Bullish measure – for extended periods across 2014-15 and late 2016-18.

Earnings season

Earnings season in Australia remains mixed, with no clear macro themes emerging.

REIT and retailer results suggest that the consumer continues to hold up relatively well.

But there are pockets of softness – for instance, the supermarket sector as price inflation falls, but no pick-up in volumes in response.

Advertising remains very soft, but industrial companies are generally seeing activity remain at the same cadence.

Cost control has been a point of differentiation at the company level, but it tends to be disciplined control rather than large restructuring announcements.

One recurring theme is that large companies, particularly with a consumer focus, are mindful about the media and government reaction to their results.

There is a less positive spin and more focus on evidence of reinvesting to help customers.

In some cases, it appears as though companies are prepared to sacrifice valuation ratings to avoid facing backlash.

Industrial and tech companies are more immune to this issue and are, therefore, faring better.

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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