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 portfolio specialist Chris Adams

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THE rotation that emerged in 2H25 has persisted into early 2026, with markets rewarding selective exposure rather than broad beta. 

Index-level resilience continues to be supported by active hedging and disciplined positioning, not a material improvement in macro confidence.

Earnings momentum remains concentrated in resources and gold-exposed names, whilst Technology (specifically software) sentiment has remained under pressure. We are watching for early signs of software stabilisation following some tentative green shoots last week. 

Geopolitics remains at the forefront of markets, with President Trump’s overtures towards Greenland contributing to a sharp rally in gold (+8.5%) and renewed weakness in the US dollar (-1.8%). The S&P 500 returned -0.3% last week.

Domestically, the S&P/ASX 300 fell 0.5%, weighed down by a hotter-than-expected labour print that brought forward RBA tightening expectations. 

Resources were a bright spot with high commodity prices contributing to strong quarterly results.

US policy and macro

Inflation

November US personal consumption expenditures (PCE), a measure of inflation, was in line with expectations.

Core PCE, the Fed’s preferred measure of inflation, rose 0.16% in November, tracking at 2.79% year on year (YoY). 

The trajectory is consistent with a decline back towards the FOMC’s 2% target and the market is pricing in two interest rate cuts in 2026. 

Adjusting for inflation, real consumption expenditures increased by 0.3% in both October and November, again in-line with consensus. 

Consumer spending was surprisingly resilient in 4Q25 with spending on goods holding up despite tariff-related cost impacts. This continues a trend of hardy consumption despite slowing incomes and a loosening labour market, which points to a declining savings rate. 

At some point, very low savings and further slowing income could become a headwind for consistently strong consumption, but we are not there yet. In addition, larger-than-usual tax refunds in early 2026 should be supportive. 

Real GDP growth

The US Bureau of Economic Analysis revised up 3Q GDP by 0.1% to 4.4%. Downward revisions to real spending were roughly offset by upward revisions to business fixed investment. 

Growth drivers were narrow, driven by the upper-income consumer and AI investment.

Jobs

Initial jobless claims increased 200,000 for the week ended 17th January, up from 199,000 but below consensus (209,000). 

Whilst low, this is more a symptom of relatively lower seasonal hiring in 4Q26 (particularly in retail) rather than a sign of a strengthening labour market. 

Davos

There was little new news on the US policy front out of Davos. 

The market was looking for more movement on Trump’s expected policy announcements on housing – for example instructions to Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds to lower mortgage rates, but there was none forthcoming. 

Trump also appeared to walk back proposed 10% tariff increases on several European nations (set to be enforced 1st of February) and announced “a framework of a future deal with respect to Greenland” after talks with Mark Rutte, the Secretary of NATO. This is seen as positive for markets.

Housing

Pending home sales fell 9.3% in December (versus consensus -0.3%), wiping out four months of recovery and surprising the market. 

Poor weather explains some part of this, but a lack of obvious trigger suggests this decline is likely just noise rather than a new sustained trend. 

In contrast, mortgage applications for the week ended 16th of January grew 5.15% to the highest level since December 2023. The 30-year fixed rate mortgage fell 2 basis points (bps) to 6.16% and is down 16bps calendar year to date.

Other data

–             Cold weather in the US from weaker-than-normal Arctic circulation patterns is contributing to a rise in natural gas prices. This may help Macquarie Group’s (MQG) commodities trading business. Cold weather can also crack pipes, possibly providing a tailwind for Reliance Worldwide’s (RWC) plumbing goods.   

–             S&P Manufacturing & Services PMIs were little changed at 51.9 and 52.5 respectively, close to expectations and providing limited incremental insight. 

Australia policy and macro

Australia is one of very few economies expected to see rates rise in 2026, along with Japan and Colombia.

And economic data last week was consistent with tighter monetary policy as employment increased 65,000 month on month in December – versus consensus at +27,000 – while the unemployment rate fell to 4.1%.

The market is now pricing two rate hikes by November, and the Aussie dollar has increased to US$0.68.

Japan

Japanese government bond (JGB) yields dropped 40bps in 48 hours following political manoeuvring and the announcement that the consumption tax on food prices would be abolished to help address inflation concerns. 

The market, fearful that the government would finance this fiscal stimulus via new debt issuance, moved immediately to short JGBs. 

Globally, bonds moved in sympathy as an idiosyncratic Japanese event manifested into broader repricing of global duration risk.

This suggests that fiscal concerns and potential shifts in central bank reactions are risks endemic to economies globally. 

We do note Japan is in a more challenged position with sticky inflation and interest rates well below where they should be for inflation at current levels. 

But that said, a continued normalisation of Japan yields may destabilise global markets, with the pace at which it occurs the issue. So we keep a watching brief on Japan for now. 

Gold

Ongoing geopolitical uncertainty and a softer US dollar have reinforced demand for real assets, with gold extending its rally and Australian gold equities now representing a larger share of the ASX 300 than at any point since the year 2000.

Gold was +8.5% for the week as it rallied towards $5,000/oz, driven by reignited geopolitical tensions as the market digested the implications of Trump’s desire for Greenland. 

The total value of gold held by central banks outside of the US is close to exceeding that of their US Treasury holdings. 

Goldman Sachs raised its December 2026 gold price forecast to $5,400/oz as private sector diversification into gold continues. 

Unlike other commodities where “high prices cure high prices,” gold supply is largely price inelastic with output limited, stable and worth about 1% of global gold stock outstanding. 

Hence, gold rallies tend to reverse when (a) geopolitical risks ease, (b) macro policy risks ease, or (c) the Fed switches from cutting rates (driving ETF inflows) to hiking rates.  In this vein, the current environment looks supportive for the rally to continue. 

Markets 

Market activity remains elevated, but investors continue to manage risk carefully rather than take big directional bets.

US equities were modestly sold last week, mainly through shorting individual stocks, while broader index and ETF positions were reduced without a clear risk-off move.

Even so, overall trading exposure remains elevated, suggesting investors are staying active while keeping net risk contained.

This reflects a clear shift from the post-pandemic market of 2021, when investors ran high net exposure and used shorts mainly as protection.

The inflation shock and rate tightening in 2022 forced a reset, and since then markets have been driven by stock selection and rotation rather than broad beta.

While directional exposure has edged up recently, it remains well below prior peaks, indicating confidence is rebuilding only cautiously and alongside ongoing risk controls.

Market breadth has improved in the US, creating more opportunities beyond the largest stocks.

Small shifts out of the S&P 500 are having an outsized impact elsewhere, with flows into smaller companies supporting Russell 2000 performance year to date.

A similar pattern is evident in Australia, where small caps, led by Resources, have materially outperformed the large-cap end of the market.

Sector rotation continues to do the heavy lifting.

Technology remains the most sold area in US markets, particularly Software, while Semiconductors have attracted buying.

Energy has seen a sharp turnaround, driven by short covering as prices strengthened, and flows into Consumer and Health Care stocks point to growing emphasis on company-specific earnings outcomes rather than macro themes.

Derivatives markets tell a similar story. Periodic volatility spikes continue to fade quickly, making it cheap to hedge the market overall, even as individual stocks remain volatile.

Investors are therefore protecting portfolios at the index level while taking risk in selected stocks and sectors.

Small caps have joined the rotation, but interest remains tactical rather than high conviction, with many investors preferring to trade volatility rather than commit capital outright.

Overall, the positioning and rotation dynamics that emerged in late 2025 remain firmly in place.

Markets continue to look stable at the index level, but risk and opportunity are increasingly concentrated beneath the surface, favouring selective exposure and active risk management over broad, directional positioning.

Australian equities

In Australia, factor performance continues to point to a market driven more by selective exposure than broad macro conviction.

Growth and momentum outperformed again last week, supported by strong contributions from the Materials sector, while value-oriented styles lagged, led by weakness in dividend yield and net buyback yield factors.

Low volatility also underperformed for a second consecutive week, suggesting investors remain willing to tolerate volatility in pursuit of upside rather than rotating defensively.

The backdrop continues to favour Materials relative to Financials, reflecting investor preference for globally linked earnings and inflation protection over domestic income-sensitive exposures.

Overall, the pattern suggests that the rotation which emerged in the second half of 2025 remains intact and has carried through into the early part of 2026, rather than showing signs of exhaustion.

Commodity prices continue to drive upgrades for Materials across the ASX. At spot prices, most resources companies would see further upgrades to earnings. 

In contrast to Materials, Information Technology has seen the largest negative earnings revisions over the past 12 months. 

Software sentiment meaningfully deteriorated over the past year as the market questions AI’s impact on software business models (e.g. seat-based pricing, barriers to entry on product development, terminal growth rate concerns). 

In Australia, this has been exacerbated by dilutive M&A (Xero) and corporate governance failures (WTC).   

Software is now the most over-sold level it has ever been based on a 14-day relative strength index (RSI) indicator.

We have been looking for a sign of stabilisation or sentiment bottoming, are we finally there?

Last week did see some interest returning to the sector with specialist software PE fund, Thoma Bravo, highlighting value on offer in the Financial Times, while there was some institutional buying in US software on Thursday and Friday and on the ASX on Friday. 

A positive trading update from Life 360 (360) in Australia helped locally. 

Evercore has highlighted the potential for a bounce, noting the iShares Expanded Tech-Software Sector ETF has bounced off its current technical level five times in 15 years, with one exception (the 2022 bear market).

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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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