Welcome to the Winter edition of On the Marc. In this edition, we will review markets for the final quarter of the 2025 financial year and consider the outlook for the foreseeable future.

Market update 

Over the second quarter of 2025 and into July, financial markets were defined by two key themes: persistent inflationary pressures and a surprising hawkish turn from central banks, particularly in Australia, against a backdrop of escalating global trade tensions.

The period began with a sharp sell-off in early April, triggered by the announcement of reciprocal tariffs between the US and China. This geopolitical uncertainty initially sent shivers through markets, causing the S&P 500 to drop significantly and US bond yields to spike. However, this volatility proved short-lived. A robust corporate earnings season and renewed investor confidence, fuelled by the view that the most extreme trade outcomes would be avoided, led to a strong recovery. US mega-cap technology stocks, in particular, delivered impressive returns, helping the S&P 500 reach a new all-time high by the end of the quarter. The US dollar, however, weakened against major currencies. At the time of writing, the Aussie Dollar against the US Dollar was trading at close to 66c. This is the highest level since October 2024.

Central bank policy diverged across the globe. While the European Central Bank (ECB) continued its rate-cutting cycle, lowering its key deposit rate in April and again in June to 2.0% amid easing inflation, the US Federal Reserve (Fed) held a more cautious stance. Despite growing calls for rate cuts, the Fed kept the federal funds rate on hold, with minutes from its June meeting revealing a split among policymakers. The primary concern was the potential for tariffs to fuel inflation and disrupt supply chains, which could hinder the Fed's progress toward its 2% inflation target. The table below illustrates the variation in rates across major economies over the past 18 months.

Central Bank Overnight cash rates

In Australia, the economic landscape was marked by resilience but also signs of a slowing recovery. GDP grew by a modest 0.2% in the March quarter, falling short of expectations, as public sector spending pulled back and private capital expenditure remained weak. The Reserve Bank of Australia (RBA) faced a difficult policy decision as inflation continued to moderate but remained a concern. While market consensus and major bank forecasts widely anticipated a rate cut in July, the RBA defied expectations, opting to hold the cash rate steady at 3.85%. This split decision, with the board citing a tight labour market and the need for more information on underlying inflation, led to a rise in bond yields. The RBA's decision highlighted its cautious approach and signalled a delay in the anticipated easing cycle.

The RBA reduced interest rates twice in the first half of 2025, leading to the reestablishment of a long-term upward trend in property prices. The chart below shows the average Sydney house price in blue and unit price in black since the start of 2019.

Market returns for major indices

Below is a table showing the percentage returns of the major market indices to 30th June 2025.

The outlook for the year ahead 

The market outlook for the rest of 2025 is characterised by a blend of ongoing resilience, significant policy uncertainty (particularly regarding US trade policy), and a general expectation of slower but still positive global growth. The following is a breakdown of key themes and forecasts:

1. Economic Growth & Inflation:

• Global Slowdown, but Avoiding Recession: Most forecasts indicate a slowdown in global GDP growth for the second half of 2025 compared to the first half, though a widespread recession is generally not expected. The IMF projects global growth at 3.3% for 2025.

• US Specifics: The US economy is expected to see slower, but still positive, growth. Some predict a growth rate around 1.5% for the full year. Inflation in the US is expected to accelerate and potentially peak between 3% and 3.5% in Q3, driven by tariff pass-through, before easing in 2026.

• Australia: Economic growth in Australia is expected to pick up, supported by improved household consumption, although it will remain below trend. Inflation is projected to return to the RBA's target band in early to mid-2025.

• Europe: Growth in the Euro area is likely to expand around 1%, with inflation falling below the ECB's target. Europe's high level of export dependency makes it vulnerable to trade war risks.

• China: China is expected to provide fiscal support to meet its growth target of around 5% for 2025, with growth projected to decline to 4.5%.

2. Monetary Policy & Interest Rates:

• Divergent Central Bank Actions: While many central banks (like the ECB) are expected to continue easing, the US Federal Reserve is likely to hold rates steady until early 2026, with potential cuts later in the year.

• Australia: The Reserve Bank of Australia (RBA) adopted a more dovish tone in July 2025, with market expectations shifting towards three rate cuts by year-end.

3. Trade Policy & Geopolitics:

• US Trade Policy as a Key Driver: US trade policy, particularly tariffs, is a major source of uncertainty and is seen as a "structural shock" to the global economy. While the immediate threat of escalating tariffs has receded somewhat after pauses, the long-term impact on global growth and inflation remains a concern.

• Geopolitical Tensions: Geopolitical tensions continue to be a risk, potentially impacting energy markets and adding to market volatility.

Did you know?

CBA, now 12% of the ASX 200 benchmark, rose 50% over the financial year and contributed 33% of the total index return. It currently trades on a forward P/E of almost 30x, and its valuation relative to the other three banks and the ASX 200 has never been wider. The big four banks collectively delivered 50% of the total index return for FY25, maintaining the same level of contribution as in FY24.

The table below compares the valuation of CBA to Lloyds Bank in the UK. The earnings multiple tells an investor how many years it would take for the annual profit of a company to cover the cost of purchasing a share.

Final reMarc

Inflation and interest rates remain the primary global concerns because politicians refuse to stop spending, and debt needs to be reduced. It is for this reason that Trump is so adamant that rates need to be reduced in the US, as it makes a massive difference to the amount of interest the US Government needs to pay. Trump’s stance is that increased productivity (resulting from reduced red tape, lower taxes, and technological efficiencies hinged on AI) will lead to a significantly higher gross domestic product, generating more tax income for the Government that can be used to cover spending and, at some point, hopefully reduce debt levels.

The world continues to monitor his change in policy stance, such as with tariffs and geopolitical events, and distinguish between what is real and what is hearsay. To a certain extent, financial markets are no longer reactive to his announcements, as the expectation is that they are a bargaining tool and will be watered down over time.

For investors it is important to remain focused on the big picture/long term and not get caught up in the short-term noise. The key is to invest in a diversified portfolio that benefits from compounding returns over time.

" The best way to predict your future is to create it. "

Abraham Lincoln

Key Facts & Figures

1. The Australian Cash Rate was on hold at the July meeting at 3.85%.

2. The RBA Cash Rate is likely to decrease in August when the RBA next meets (95% chance of a 0.25% rate cut).

3. Our annualised inflation rate is 2.4%. This is within the RBA’s target band of 2 - 3%.

4. Australia’s unemployment rate is 4.3%.

5. The US Federal Reserve cash rate band is 4.25% - 4.50%.