Jim Taylor: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week according to Pendal portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

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BY AND large things in the US remain on track.

American consumers are about to feel the fiscal boost from tax cuts, their labour market is solid, bond and credit markets are well behaved, earnings are very strong, inflation is flattish and expectations remain anchored.

This is translating into the equal-weighted S&P500 reaching a record high and a broadening of sector leadership with historically low levels of stock correlations, albeit with elevated levels of volatility.

The software space, however, continues to see heavy selling pressure on the AI disruption theme. As a result the S&P 500 shed 1.4% last week.

Market concerns that AI could become a broader market overhang drove contagion last week into insurance brokers, asset managers, trucking, logistics and commercial real estate.

About three-quarters of the US reporting season is done and the results are solid at a revenue and EPS level.

Positive labour data and a benign January CPI print didn’t materially move expectations on the timing of expected rate cuts in the US.

Meanwhile ASX reporting season has thrown up an assortment of hits and misses. An increase in result-day volatility – which we have seen over the past few halves – seems likely to continue.

The S&P/ASX 300 was up 2.3% last week. Bank reporting has provided some reassurance that earnings risk is low and the market remains positively predisposed to resource stocks.

Macro and policy US

Retail sales

Headline retail sales and sales ex-autos were both flat in December, well below the consensus expectations of 0.4% growth for both categories.

The strong growth in spending in 2H 2025 looks unsustainable as real income growth has slowed and spending rates were sustained by a drawdown in savings.

The current savings rate of 3.5% is well below the longer term average of about 6%

A more sustainable spending growth is more like 1.5%.

Labour markets

Despite growing rhetoric, at this point there is little sign of a spike in job losses as a result of AI. The tech/AI sector is losing 5-6k jobs a month on average, but this trend has been in train from early 2023 and remained largely constant over the course of 2025.

The US Bureau of Labor Statistics has done work on the sectors they feel are to job erosion from AI such as business support services, credit intermediation, legal services and insurance and claims adjusting. Here, job losses actually improved from circa 8-10k/month during 2024 to 3-5k per month over the course of 2025.

The employment cost index (ECI) rose by 0.7% in Q4, slightly below the consensus, 0.8%.

This increase was the smallest since Q2 2021 and saw the year-over-year rate at 3.4%, which is also the lowest rate in a four-and-a-half years.

In combination with productivity growing at 2%, unit labour costs are rising at 1.5%. This is low enough to return core personal consumption expenditures (PCE) inflation – the Fed’s preferred measure – to the 2% target.

At this point there is no real sign that reduced immigration is driving sector-specific wage pressures.

For example, wages and salaries in construction rose by 0.7% in Q4, which was in-line with the broader average. Wages in the accommodation and food services sector increased by 0.8%.

Education and – to a lesser extent – healthcare are the only sectors still seeing solid wage growth.

Payrolls rose by 130K in January, which was well above the 65K consensus, while the two-month net revision was -17K.

After a string of weaker payrolls prints this number has come as something of a positive surprise.

The key strength is in Health with 124k jobs for the month versus a monthly average of around 58K jobs in 2025.

The unemployment rate dipped to 4.3% in January, from 4.4% previously. Consensus was also at 4.4%.

Average hourly earnings rose by 0.4% in January, a touch above the 0.3% expected by consensus while year-on-year growth is at 3.7%. This is slightly higher than the 3.4% reflected in the ECI, however the market – and the Fed – probably take the ECI as the truer read on labour cost movements.

Initial jobless claims dropped to 227K in the week ending February 7, from 232K, above consensus of 223K.

Continuing claims increased to 1,862K in the week ending January 31, from 1,841K, above the consensus of 1,850K.

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Inflation

The US five-year forward breakeven rate – a indicator of inflation expectations, has moved up recently but still remains with in range of the last 3-4 years.

The consumer price index (CPI) rose 0.2% month/month in January, versus 0.3% expected, taking the year/year rate to 2.4% versus the 2.5% expected by consensus and 2.7% in December.

The core CPI increased by 0.3%, in-line with consensus, to be up 2.5% year/year which is the lowest since April 2021. Food, shelter and petrol prices are all trending in the right direction.

Fedspeak

Chicago Fed President Goolsbee noted that services inflation remains problematic and “worrisome”, it is “not tame” and “pretty high” in the latest CPI figures. He also expressed scepticism that the U.S. economy is on track to reach the Fed’s 2% inflation target. Instead, he thinks it appears “stuck around 3%.”

Despite this, he maintained that interest rates “can still go down,” but further progress is required on inflation.

He sees the labour market as steady and US consumers as the economy’s key strength at the moment, expecting this to persist if the job market remains stable and inflation eases.

Macro and policy Australia

RBA Governor Bullock told the Federal senate the RBA will raise rates again if inflation becomes entrenched.

These remarks echoed Deputy Governor Hauser, who said earlier in the week that inflation is too high.

The RBA now expects both headline and core inflation to overshoot the upper end of its 2-3% target range this year.

Bullock added that it is not clear if more rate hikes will be needed given uncertainties with forecasting. She emphasised that they will remain data-dependent and continually reassess forecasts going forward.

Cash rate futures continue to price in a further 25 bp rate increase by August.

She hosed down the notion of government spending driving inflation, noting that it is not fiscal policy which has driven the increase in inflation expectations from November.

She also pointed out strength in the labour market remarking that “everyone’s been focusing on the negatives, but we’re in this position because the economy is actually doing okay.”

The Westpac-Melbourne Institute consumer sentiment index fell -2.6% month/month in February. This is the third consecutive month of falling confidence.

It was driven by a broad-based softening across most major sub-indexes with views on current conditions weak.

Housing sentiment was mixed; the proportion of respondents thinking it is the right time to buy fell -6.3%, whilst house price expectations reached a new 15-year high.

Interest rates clearly continue to be a driver of the month-to-month move, with 80% of respondents expecting rates to go up – and 30% expecting rates to be up by 100bps over the year.

The January NAB Business Survey also showed some softening in conditions. Capacity utilisation (a focus of the RBA) fell to lowest level since July 25.

Overall, the soft outcomes are largely as expected given the more hawkish RBA expectations around these surveys.

How sentiment evolves from here will be a key domestic driver.

The value of new dwelling finance commitments increased by 9.5% quarter/quarter in 4Q2025, above the 6% expected by consensus.

The increase was broad-based across investors (+7.9% q/q) and owner-occupiers (+10.6% q/q). Within owner-occupiers, new commitments for first home buyers rose at their fastest pace since 4Q 2020 following the expansion of the 5% Deposit and ‘Help to Buy’ schemes.

The number of new dwelling finance commitments increased by 5.1% q/q in the quarter.

All-in-all, this is all supportive of the outlook for banks.

Markets

US reporting season

The blended earnings growth rate for Q4 S&P 500 EPS currently stands at 13.2% – above the 8.3% expected at the end of the quarter. The blended revenue growth rate is 9.0%.

Of the S&P 500 companies that have reported for Q4, 74% have beaten consensus EPS expectations. This is below the 79% one-year average and the five-year average of 78%.

In terms of sales, 73% have beaten expectations, above the 71% one-year average and the five-year average of 70%.

In aggregate, earnings are 7.2% above expectations, below the 7.4% one-year average positive surprise rate and the five-year average of 7.7%. Sales are 1.6% above expectations, above the 1.3% one-year positive surprise rate but below the five-year average of 2.0%.

Australia

Week two of reporting season saw net EPS surprises of +8% (with season-to-date +3%).

Given the early skew to positive results there is a risk we end up negative on this front.

From a price reaction perspective it feels like the results are much worse than they actually are, with the median stock down 2-3%.

“Old economy” and value stocks like Banks, Utilities and Materials have had a strong season versus Growth and Technology stocks. The technology sector was down -4.7% and the selling from last year’s peak has been largely indiscriminate across both profitable and unprofitable companies.

About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. 

Find out more about Pendal Focus Australian Share Fund here.

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