Oliver Renton: What’s driving Aussie equities this week

Here are the main factors driving the ASX this week, according to portfolio manager OLIVER RENTON. Reported by portfolio specialist Jonathan Choong

• Find out about Pendal Focus Australian Share Fund

AS THE year draws to a close, market activity slows while strategists and brokers release a flurry of forecasts – it being no surprise that the majority of Wall Street expect US stocks to continue to rally in 2026.

Major equity indices were sluggish this week with the S&P/ASX 300 down 0.8% while the S&P500 ended flat at 0.1%.

Last Friday was “quad witching” day referring to the simultaneous expiry of stock index futures, stock index options, single-stock options, and single-stock futures.

This drove significant turnover with around US$6 trillion to US$6.5 trillion in contracts expiring on the day.

Summarising 2025, we have seen a material rotation in markets with the S&P 500 IT and Utilities sectors posting substantial gains through the start of the year to 31 October, only for leadership to reverse in these final months of 2025.

The ASX200 has also experienced a similar swing this year yet has lagged most of its global peers more broadly, particularly tech which has trailed significantly behind the US.

US macro and policy

US employment data has remained mixed in the aftermath of the government shutdown.

Nonfarm payrolls rose by 64,000, slightly exceeding expectations, yet the unemployment rate climbed to 4.6% — its highest since September 2021 and above consensus forecasts.

These developments did little to alter market expectations, with investors still anticipating two further Fed rate cuts next year. Reflecting this sentiment, the S&P 500 saw a small decline, Treasuries strengthened, and the US dollar eased.

Inflation data showed improvement, with core CPI falling to 2.6% in November from 3.0% in September. Much of this change stemmed from measurement issues linked to the shutdown.

Data collection resumed in mid-November, capturing a greater proportion of discounted prices, particularly those associated with Black Friday promotions.

Looking at the consumer, headline retail sales were flat in October, slightly below consensus and net revisions were –0.1%.

Sales excluding autos rose 0.4%, above consensus, and control retail sales increased 0.8%, well above consensus.

The Bureau of Labor Statistics assumed rents remained unchanged in October, without any catch-up adjustment in November, and auto insurance data was not collected — potentially raising the risk of a spike in December’s figures.

Nonetheless, the inflation outlook remains constructive.

Manufacturing surveys point to slowing core goods prices in early 2026, while a sharp drop in the quits rate indicates slower wage growth and reduced services inflation.

Recent increases in Zillow’s measure of new rents suggest the trend in primary rents and owners’ equivalent rent will continue to moderate through next year.

With these factors at play, core CPI and core PCE inflation are projected to decline rapidly in 2026, with core PCE expected to approach the FOMC’s 2% target by year-end.

Despite the moderation in inflation, sentiment indicators reveal we are seeing the widest divergence in US consumer confidence seen in seven years, underscoring ongoing market dislocation and “K-shaped” economy thematic.

Fedspeak

US Federal Reserve Governor Christopher Waller reiterated support for further policy easing in 2026, citing near-zero jobs growth and advocating for a moderate pace of rate reductions to support employment.

US Treasury Secretary Scott Bessent also indicated that one or two interviews remain for the next Fed Chair, with an announcement from US President Donald Trump expected in early January.

Bessent described Director of the National Economic Council Kevin Hassett and former Fed Governor Kevin Warsh as “very, very qualified”.

Other global macro

As expected, the Bank of Japan raised interest rates by 25 basis points, prompting a rally in Japanese bond yields.

In the UK, the jobless rate for 16- to 24-year-olds climbed to 16% in the three months to October, the highest since early 2015.

UK inflation also rose 3.2% in November, below expectations and marking an eight-month low, reinforcing expectations for a BOE rate cut this week.

Energy markets also experienced notable moves as oil prices declined, with Brent down 2.7% to $58, the lowest level since the first quarter of 2021, following progress in Russia–Ukraine peace talks and oversupply concerns.

China macro and policy

China’s November data showed a further slowdown. Industrial production rose 4.8% year-on-year, missing forecasts, as demand weakened alongside fewer working days versus pcp.

Major declines appeared in autos, railways, agri-food, metals, machinery, and power. Services output grew 4.2%, down from October, as consumption growth softened.

Retail sales growth plunged to 1.3% year-on-year, far below expectations of 2.9%, with weakness across most categories.

Sharp declines were recorded in tobacco, liquor, appliances, furniture, petrol, autos, and building materials — signs stimulus effects are fading and some spending shifted forward to October.

Fixed asset investment fell further, down 2.6% year-to-date, with broad softness and a deeper slump in real estate.

However, November saw a modest rise in infrastructure and manufacturing investment, possibly reflecting early fiscal support beginning to flow through.

Special bond issuance jumped to RMB492.2 billion, up strongly from a year ago.

Incremental fiscal policy is expected to have a limited near-term impact, with stronger effects likely in Q1 2026. Consumer sentiment likely remains subdued.

The Central Economic Work Conference called for more proactive fiscal and moderate monetary policy, but the 2026 deficit target will likely stay at 4% of GDP, signalling no extra fiscal boost.

GDP growth is forecast to slow to 4.5% in 2026.

Australia macro and policy

The FY26 MYEFO delivered an improved fiscal outlook for this year and across the forward estimates, reflecting a strong economy and higher-than-projected revenue.

The improvement was driven largely by personal income tax receipts, underpinned by a robust labour market, rather than commodity prices exceeding Treasury’s conservative assumptions. No new policy measures were announced.

In mild contrast, the Westpac consumer sentiment survey fell back into pessimistic territory in December, down 9% month-on-month and reversing November’s bounce.

Despite softer confidence, unemployment expectations edged lower and now sit just below the long-run average.

Interest rates were a key driver, with rate expectations up 22% — the sharpest monthly increase in the survey’s history.

Subindexes also weakened, with deteriorating views on the outlook and household finances, and a sharp decline in intended spending.

The response of the economy to a less supportive policy outlook remains in focus, with the RBA’s rate path set to be a key factor for momentum in 2026.

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Markets

Major equity indices posted a soft week, with the S&P/ASX 300 down 0.8% as resources lagged, while banks held steady. Contractor names along with select tech names were the winners.

Small caps outperformed, with the S&P/ASX Small Ords rising 0.8% largely driven by small resources.

US equities were soft through the week but rebounded on Friday to finish largely flat with the S&P 500 at 0.1%.

In the bond markets, rates were little changed over the week. Australian 2- and 10-year yields rose 53 basis points over the quarter, while US 2-year yields moved lower.

Looking back on the year so far, the ASX 300 has delivered a solid gain of 9.3%. The S&P/ASX 50 Midcap rose 16.9%, and the S&P/ASX Small Ords advanced 23.2%.

The ASX, however, lagged global peers in annual returns, with most major markets up around 20%.

Interestingly this year there has been a 64% difference in performance between AI enablers vs AI disrupted stocks across the US and EU, which explains part of this divergence.

Digging into the ASX sectors:

• Resources — both large and small — were the standout performers up over 30%.
• Materials also led, up 34.0% for the year, reflecting trends in China.
• IT declined 1.1% for the week but fell 23.3% for Q4, accounting for most of the annual loss of 18.6%.
• Financials posted an 11.0% rise for the year.
• Healthcare fell -23.0% for the year, with CSL weighing on the sector.
• Energy was flat for the year but dropped more than 5% for the week.
• Industrials were subdued, up just 3.4%.

In commodities, oil prices fell for the week and ended the year down ~20%.

Iron ore was stable across all periods while copper, aluminium, and lithium posted strong annual gains.

Gold rose 65%, dominating the headlines for the year. Elsewhere Bitcoin declined 9.9% for the year marking a significant dislocation from the gold price.

Interesting observations 

The following are a handful of market observations of note:

• As mentioned in the beginning, recent sector moves have been pronounced, and rotation remains challenging for those positioned on the wrong side.
• The market has shown signs of significant factor rotation, with growth and quality in the S&P/ASX 100 underperforming this December — a notable shift after a prolonged period of outperformance.
• More broadly, US quality stocks have also seen their worst year since 2009.
• Historically, the S&P 500 following a major drawdown and strong rebound in the same year tends to deliver robust returns for the next year.
• Large intra-year drawdowns are also not unusual, and the recent run of eight consecutive up months typically signals ongoing strength.
• Similarly, the current elevated put/call ratio has historically preceded a market rally.
• Despite concerns, all-time highs should not be feared; markets have historically sustained extended runs of record levels, for example the S&P 500 between 2013 and 2022.
• Since 1945, the S&P 500 has delivered an average annual total return of 13%, with 79% of years posting positive returns.
• The composition of the index has undergone significant changes. Compared to 1999, only 193 constituents of the S&P 500 remain in the index, while just 19 are still included in the Nasdaq 100.
• In 2015, only two of the top 10 S&P constituents were classified as technology companies. By 2025, that number has risen to eight.
• Federal Reserve activity has slowed over time with the number of Fed moves by decade decreasing.
• Since 1992, Chinese GDP has expanded 51x, while US GDP has grown 5x. Over the same period, Chinese A-shares have returned 8x, compared to a 29x gain for the S&P. Despite China’s outsized GDP growth, its equity returns have lagged.
• Part of the explanation is that business formation in the US remains robust, with an average of 170k “high propensity” applications to start new businesses in the US each month.

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 14 years of its 18-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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