Elise McKay: 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. Reported by head investment specialist Chris Adams

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HEADLINES are dominated by trade and AI at the moment – two structural forces with the potential to reshape markets for years to come.
Once driven by economic efficiency, global trade flows are now being redefined by national security priorities.

Tensions eased modestly in this respect after last week’s Trump–Xi meeting signalled de-escalation rather than confrontation.

Meanwhile the big four “hyperscalers” – Microsoft, Amazon, Alphabet and Meta – reported earnings that underscored a new phase of AI-led investment, with capex budgets revised meaningfully higher.

This helped lift the S&P 500 (+0.7%) and NASDAQ (+2.3%). Though flow data shows the rally remains narrowly led and heavily hedged – a “liquid, levered, but not long” market where resilience reflects liquidity and capital concentration rather than broad conviction.

The Fed’s “hawkish cut” last week reinforced this tone of cautious optimism.

Fed chair Jay Powell compared policy to “driving in fog”, signalling the Committee’s growing division over the December meeting.

Having retraced only 28% of its prior tightening, the Fed remains cautious by global standards, leaving the economy to run on its own amid a soft patch of moderating job growth, flat housing activity and an ongoing government shutdown.

Yet inflation expectations remain well-anchored, and the AI capex boom continues to deliver productivity and margin gains that help offset cyclical softness.

Looking ahead, provisions in Donald Trump’s “One Big Beautiful Bill Act” tax bill and a strong US fiscal impulse into 2026 should broaden growth, supporting the case for a gradual move toward neutral policy settings.

Domestically, the ASX 300 fell 1.5% last week, weighed down by a hotter-than-expected CPI print which pushed back RBA easing expectations and pressured rate-sensitive sectors.

Healthcare was the biggest drag, led by CSL’s downgrade, while the tech sector underperformed on renewed regulatory scrutiny.

Within Australia, the RBA is firmly on hold, GDP growth is stabilising, and market leadership is rotating.

Looking ahead, a mix of mega-cap capex, a measured Fed easing cycle, and resilient domestic growth should provide underlying support – reinforcing the case for maintaining balanced portfolios and focus on stock selection after a volatile month.

US macro and policy

The ongoing disconnect between a softening labour market and resilient GDP growth remains one of the key macro puzzles.

Population growth in the US has slowed from around 0.7% per annum in the 2010s to just 0.3% in 2025, with net immigration collapsing since 2023 as policy reforms curtailed inflows.

Despite this demographic drag, activity has remained firm – the Atlanta Fed GDPNow model currently estimates Q3-25 GDP growth at 3.9% (as at 27 Oct 2025).

We have good visibility into US fiscal spending in 2026 driven by the Big Beautiful Bill, providing a tailwind to the economy throughout the year.

At the same time, corporate profitability has continued to rise.

Margins and revenue per employee have expanded sharply, particularly in the technology sector, where the decline in selling, general and administrative (SG&A) expenses has accounted for roughly two-thirds of total margin expansion since 2020.

This combination of slowing employment growth, solid output and widening margins suggests productivity – whether genuine or mismeasured – is quietly improving beneath the surface.

So what does this mean for markets?

The immediate focus has been on the outlook for rates.

While the Fed delivered a 25bp cut last week, Chair Powell’s tone was notably more hawkish than expected.

He stressed that a December move was “far from a foregone conclusion”, highlighting the wide range of views among governors and the growing challenge of operating without reliable economic data amid the full government shutdown.

Pressure is mounting as funding for SNAP food stamps lapses and air traffic controllers miss pay cheques, while key data releases – including durable goods, GDP, and unemployment claims – have been delayed, compounding uncertainty.

The expected terminal rate edged higher to about 3.1%. Markets pared back expectations for a December cut from near certainty to around 60%.

The market interpreted Powell’s remarks as reflecting division in the rate-setting Federal Open Market Committee, rather than a material change in stance.

A December cut remains the base case, with softer labour-market conditions and underlying core PCE inflation now near 2.2-2.3%.

Without fresh data, the Fed’s next decision will hinge on its assessment of downside labour risks rather than hard evidence.

A prolonged shutdown could delay easing into early 2026, but the broader trajectory remains toward lower rates – reinforcing near-term USD support and a higher-for-longer front end, with scope for renewed steepening once clarity returns.

Powell’s hawkish tone may also have been intended to balance a more dovish shift on the Fed’s balance sheet.

The Fed confirmed that quantitative tightening will end on 1 December, with paydowns from mortgage-backed securities now reinvested into Treasury bills rather than allowed to roll off.

The decision follows recent funding market tightness, with repo and Fed funds rates trading above target.

Powell noted that the balance sheet will be held “constant for a time, but not a long time”, with net T-bill purchases and modest balance sheet expansion likely from March.

The adjustment effectively adds another 25bps of easing in liquidity terms, even as the Fed maintains a cautious tone on rates.

Australia macro and policy

Australian economic data last week delivered a strong upside surprise on inflation, reshaping the near-term policy outlook.

Q3 CPI came in well above expectations, with trimmed mean (the RBA’s preferred measure of underlying inflation) rising 1.0% q/q and 3.0% y/y, driven by persistent services and housing cost pressures and sitting at the top end of the RBA’s 2-3% target band.

This effectively rules out any RBA easing in November following Governor Michele Bullock’s comment that a print of 0.9% q/q would be a “material forecast miss”.

The tone ahead is likely to remain hawkish, with inflation forecasts revised higher.

Producer price data released late in the week reinforced this picture, showing upstream cost pressures running ahead of consumer prices.

Barrenjoey noted that construction and services sectors are seeing the broadest cost increases, with over 60% of service industries recording PPI growth above 3% – a dynamic inconsistent with inflation sustainably at target.

This points to cost-push inflation becoming more entrenched, suggesting limited relief from tradeables and little evidence of a deflation pulse from China.

The broader economy remains on a gradual recovery path, with real GDP growth tracking around 2% y/y in Q3, supported by improving private-sector demand and resilient household spending.

Credit growth has stabilised, household disposable income rose 4% y/y aided by wage gains and tax relief, and businesses continue to report solid profitability.

Momentum is shifting from public to private demand, but the persistence of upstream price pressures implies the RBA will need to keep policy restrictive for longer – with any easing now unlikely before mid-to-late 2026.

Hyperscale capex

Last week saw large hyperscalers Microsoft, Amazon and Alphabet all report an acceleration in cloud growth rates, with Microsoft noting that revenue growth is now constrained by capacity rather than demand.

Capex expectations were lifted across the board (including Meta), with each signalling higher investment in FY25 and FY26 to expand AI and cloud infrastructure.

Remaining Performance Obligations (“RPO”) – contracted services that have not yet been delivered or recognised as revenue – across the group of companies have surged to over US$1.2 trillion, up nearly 100% year-on-year, highlighting demand running well ahead of supply.

This backlog provides a powerful lead indicator for continued hyperscale capex through 2026, underpinning sustained demand for data centres, semiconductors, and power infrastructure.

The acceleration in bookings reflects customers locking in long-term AI and cloud infrastructure commitments, particularly multi-year microchip and compute contracts.

Because these obligations must be fulfilled with physical infrastructure, RPO growth provides a forward-looking indicator for hyperscale capex.

Investment bank advisory firm, Evercore have done work showing that the ratio of trailing twelve month (TTM) cloud bookings to TTM capex has improved materially, suggesting that rising investment is being driven by demand signals rather than speculative build.

In practical terms, strong RPO momentum implies that hyperscale capex will remain elevated through 2026 as providers expand data centre capacity to service backlog conversion.

Sustained RPO growth offers some confidence in the durability of cloud and AI infrastructure investment, providing visibility into the broader hyperscale spending cycle that anchors data centre construction, semiconductor demand, and power infrastructure growth.

Given the sheer scale of spending, which now exceeds US$400 billion annually, and the circular financing deals emerging, many have drawn parallels with the fibre build-out of the late 1990s.

During the dot-com boom, roughly 80% of the fibre cables installed remained “dark” even four years after the market peaked.

By contrast, today’s AI infrastructure cycle currently sees demand running well ahead of supply.

While the numbers sound extraordinary, history suggests this cycle may have further to run.

Past technology revolutions saw investment impulses peak at between 2–5% of GDP.

Generative AI investment, by comparison, is still around 1% of GDP, implying we remain in the early innings of this build-out.

Importantly, these cycles typically precede productivity booms by several years, reinforcing the view that the current phase is about capacity creation rather than return realisation.

There are several implications for markets, including how record capex reshapes sectors (for example, real estate and utilities) and creates entirely new ones such as “neo-clouds.”

Data centre construction has already overtaken office development in the US, while power demand from data centres is set to rise more than 10% per annum through 2040 — highlighting a structural shift in capital flows and infrastructure priorities.

The labour market implications are less certain. Anecdotes abound:

• Amazon reportedly reduced 10% of its head office workforce, citing AI productivity gains
• a major shipping company lifted shipments per employee by 1.5x, implying a ~30% reduction in headcount
• and a mortgage lender claimed sixfold efficiency gains in underwriting, saving US$40 million annually

Yet, as technology investment firm Coatue and others note, many of these “AI productivity” stories are hard to disentangle from cyclical utilisation effects or rate-driven cost cuts.
In some cases, the gains may be as much about management narrative as machine learning.

Still, early evidence suggests productivity uplift is real, even if uneven.

Academic studies and company anecdotes converge on an estimated 25–30% productivity boost from AI adoption – gains that, if sustained, would meaningfully influence GDP growth, labour market dynamics, and ultimately the trajectory of interest rates.

Over the long term, history offers some reassurance that humans and markets adapt; more than 60% of jobs performed today did not exist in 1940, underscoring how technological shifts tend to reallocate rather than eliminate work.

US-China trade

The long-anticipated meeting between President Trump and President Xi produced exactly what markets were hoping for — stability, not escalation.

After 90 minutes of talks, both sides signalled a commitment to maintain the status quo of “managed decoupling.”

China framed the outcome as a one-year trade truce extension, with Trump to visit Beijing in April and Xi invited to Washington in 2026. Key deliverables included:

• Xi’s pledge to curb fentanyl exports in exchange for Trump cutting the related tariff from 20 % to 10 %.
• Suspension of China’s planned rare-earth export restrictions, matched by Trump’s decision not to impose 100 % tariffs.
• Removal of certain entity-list designations and port fees, and a commitment by China to purchase more U.S. soybeans.
• A framework for renewed dialogue on chip exports and potential U.S.–China energy deals.

In aggregate, US research firm Strategas estimates the package equates to roughly US $16 billion in tariff relief and signals a return to deal-by-deal pragmatism rather than confrontation.

Markets read the outcome as a tactical de-escalation, mildly supportive for global cyclicals and commodities.

For Australia, the temporary easing of rare-earth tensions may weigh on prices in the short term, but the meeting reaffirmed the strategic importance of diversifying critical-mineral supply chains outside China — a long-term structural positive for producers such as Lynas and Iluka, which remain central to Western supply-chain resilience.

The de-escalation between US and China could also be supportive for the Aussie dollar.

Despite a sharp decline in the US dollar through the first half of 2025, AUD/USD has failed to benefit – a notable divergence for a traditionally high-beta “shock absorber” currency.

Unlike past crises where the Aussie dollar rebounded 40–50% within a year, it has made no net progress since the 2024 US election.

The difference lies in the nature of this shock: a trade-war-driven slowdown that disproportionately affects Australia’s China-linked export base.

With global growth, employment, and inflation indicators now stabilising, the worst appears over, and the Aussie dollar is well positioned to stage a gradual recovery, supported by improving geopolitical tone following the Trump–Xi summit and narrowing rate differentials as the RBA ends its easing cycle.

Macquarie Group, for example, expects it to rise to US$0.67 by end-2025 and US$0.70 by end-2026.

Equity market flows and rotation

Equity market flows in the US through the past week suggest that activity levels remain high, but conviction in a directional outlook remains low.

Gross trading volumes saw the largest increase in nearly seven months, with short sales in macro products (primarily ETFs and index futures) slightly outpacing long buys.

ETF short interest rose a further 7% on the week (+8.7% month-on-month), led by small-cap, industrial and credit exposures.

At the same time, single-stock activity remained net positive for a ninth week out of ten, led by short covering in Information Technology – the largest in four months – as investors rotated back toward mega-cap AI names following strong results from Amazon, Apple and Alphabet.

In contrast, financials flipped to the most net-sold sector after six weeks of buying, while consumer names were under pressure as more companies flagged signs of a spending slowdown.

Market positioning remains elevated but cautious – gross leverage declined slightly to 215% (96th percentile over 3-years), but net leverage lifted to 53% (48th percentile over 3 years). This indicates that funds are staying busy but not taking a directional view on markets.

The long/short ratio of 1.65x sits near multi-year lows, reinforcing that markets are still trading on relative value rather than macro conviction.

Notably, the put-call skew in the Mag7 complex inverted for the first time since December 2024, signalling extreme optimism and the potential for short-term consolidation as positioning becomes one-sided.

Across ETFs and factor strategies, the chase for growth remains evident – momentum products have seen six consecutive weeks of inflows while minimum-volatility ETFs continue to experience outflows.

This suggests retail investors are adding risk despite a more cautious institutional positioning.

Flows into broad tech and AI-infrastructure themes have persisted, while selling has emerged in semiconductors and rare earths after outsized gains.

Overall, flow data point to a market that remains liquid and well-hedged, with rotation playing out within equities rather than into equities.

Investors are trimming exposure to sectors leveraged to a cutting cycle — such as small caps, cyclicals, and rate-sensitive financials — and rotating back toward structural growth leaders in technology and AI.

This supports a view that the market’s resilience is being driven more by positioning and capital concentration in mega-cap tech than by broad-based confidence in the macro outlook.

Markets

In Australia, there was meaningful dispersion across sectors and factors.

A hotter-than-expected CPI print unsettled rate-cut expectations and drove a sharp style rotation, with Value and Profitable Growth factors outperforming while Momentum lagged.

The shift suggests investors are favouring earnings visibility and balance-sheet strength over macro beta, consistent with a more cautious sentiment backdrop.

Low Volatility and Quality factors also underperformed as the inflation surprise weighed on defensives.

Overall, the pattern points to a market that remains fundamentally resilient but more selective, with rotation now favouring quality Value and large-cap Growth over crowded Momentum trades.

At a sector level, we saw strength in energy (particularly uranium), consumer staples (on trading updates from Woolworths and Coles) and resources.

The U.S. government signed a strategic partnership with Westinghouse to invest >US$80 billion in building nuclear reactors as part of a broader effort to secure an energy supply chain and advance alternative energy research.

This initiative signals a long-term commitment to nuclear power, which is expected to drive sustained demand for uranium.

For uranium miners, the flow-through impact is significant: higher reactor build-out translates into increased uranium consumption, supporting stronger pricing fundamentals and incentivizing production expansion.

In the medium term, this could tighten supply-demand dynamics and bolster valuations across the uranium mining sector.

ASX-listed uranium miners like Boss Energy and Paladin rose on the news.

Meanwhile, rare earths names Lynas and Iluka fell as China rare earths export restrictions being were delayed 12 months following the Trump / Xi meeting.

The pullback in gold sparked debate over whether the sharp price reaction reflected panic selling or technical flows.

Trading data shows it was largely momentum-based selling by systematic and quant funds as stretched positioning unwound.

By late October, momentum indicators had normalised, suggesting the worst of the unwind is complete.

Momentum traders remain net long, while retail investors continue to hold substantial positions — pointing to stabilised positioning but limited fresh buying power unless macro catalysts, such as lower yields or a weaker USD, emerge.

REITS were down 4.3% last week, following the surprise Q3 inflation read, with the largest fall in residential developers Mirvac (MGR, 5.9%) and Stockland (SGP, -5.6%).

The stock price moves were exaggerated relative to actual moves in interest rates – bank bills rose +0.14bps to 3.64% and 3 year swaps +0.14bps to 3.48%.

It is worthwhile noting that bank margins have contracted by a similar amount over the course of calendar 2025, so weighted average cost of debt is not really rising

Meanwhile the residential market is strong. Last week, small cap residential developer, Cedar Woods, reported Q1 residential landsales that are up 17% versus last year. Sales on hand increased 15% over the past quarter and now represent over 90% of management’s forecast settlements for FY26.

Western Australia made up most Cedar Woods’ sales for the quarter with average house prices in Perth >30% in the past two years. Southeast Queensland continues to make up most of the balance, with that region having shown similar price growth dynamics to WA.

Mall REITS actually benefit from modest hikes in inflation – about 70% of specialty rents are linked to CPI and Scentre Group (SCG) has recently reported rising occupancy levels at 99.7%.

AGM season is well underway with trading updates alongside quarterly results.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise 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 Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

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