Corporate profits have demonstrated some resilience, despite some broader economic headwinds, elevated operating costs and relatively tight financial conditions. The forthcoming financial year results will provide some further clarity - we expect to see some evidence of inflation and a generally weak private sector crimping earnings growth, but hopefully also some more optimism in 2026 outlook statements.
Within the market sectors energy shares performed well, influenced by a short-lived oil price hike due to the Israel-Iran conflict, and the conditional take over approach for Santos by a consortium led by the Abu Dhabi National Oil Company.
The financial sector also performed strongly, rising over 14% for the quarter. CBA and the other large banks led the way, enjoying strong market trend momentum and support, with a continuation of surprisingly mild credit conditions and low arrears.
Commodity prices in US dollar terms fell in the June quarter causing most specialty and diversified mining company share prices to remain weak. However, there has been a noticeable pick up in this sector in recent weeks on the back of more stable economic data from China and a broad rotation of investor funds towards more cyclical material sector stocks.
Australian economic indicators showed a slight moderation in growth but, the overall picture was one of resilience. Underlying inflation continued to trend down, with the May monthly CPI release indicating annual trimmed mean inflation within the RBA's target band for six consecutive months. This supported the RBA's easing stance. Total credit growth increased, with business lending continuing to grow strongly, and mortgage debt also rose, leading to strong house price growth.
The outlook for Australian shares is cautiously optimistic, balancing supportive domestic factors with lingering global uncertainties. The economy is expected to continue growing at subdued but slightly improved pace and further interest rate cuts are widely anticipated in the second half of 2025 bringing the cash rate into the 3% to 3.5% range. This scenario should help domestic-focused stocks that can benefit from the RBA's easing cycle and relatively resilient household consumption. Moreover, Australia is seen as a stable and defensive investment locale, a bit removed from some of the more focal point issues of North America, and therefore an increasingly attractive investment destination for international investors.
International Shares
In the March quarter the MSCI world stock market index rose by a stellar 11%, continuing the US dominated strong performance of recent years.
Investors reacted positively to the improving tariff rhetoric and more specific news such as the US loosening restrictions on AI semiconductor chips being sold to China. In essence, whilst tariff talk remained an overhang, the market seemed to adapt to the "less bad" news.
A major driver of the stock market recovery was the strong second-quarter earnings season in the United States where a significant percentage of S&P 500 companies reported results that exceeded analyst expectations. Despite earlier lower forecasts for profit growth, businesses maintained a strong pace of investment, especially in sectors focused on Artificial Intelligence. Many companies signalled continued commitment to AI-related capital expenditure, reinforcing this as a long-term trend. The tech sector led the rally, with a renewed appetite for risk and a strong rebound in AI development and hardware stocks.
While the Federal Reserve had kept interest rates steady, the market found comfort in the prospect of potential rate cuts later in the year. The Fed's "dot plot" in June implied a central case forecast of two more 25-basis-point policy rate reductions in 2025, which aligned with market expectations. This may provide a tailwind for the global stock markets.
European stock markets delivered positive performance in the June quarter, despite a backdrop of initial volatility and geopolitical uncertainties. The broad European market index, referred to as Euro Stoxx, saw a significant gain of +9.97% in Q2 2025. The UK FTSE 100 also performed well, recently reaching an all-time high, as did the German DAX index. French shares performed less well, held back by domestic sovereign debt and political issues. The weakening of the Australian and US dollar against the Euro, British Pound and Swiss Franc favourably impacted returns for Australian domiciled investors. Generally, Europe’s stock valuation metrics have improved due to the passing of the post-Covid economic trough and more focussed pan-European policy settings including accommodating monetary policy.
In Asia, the Japanese, Taiwanese and South Korean markets performed well, driven by their respective technological prowess in the fields of industrial automation and semiconductors. Chinese and Indian shares meanwhile were more affected by trade and tariff pronouncements. Singapore has been the recent standout market in Asia, benefiting from a solid economy, quality corporate financials and a sound and stable political system.
The Australian dollar recently fell, then rose again, against the US dollar cross. Rapid recent movements in our currency have primarily been driven by US centric events rather than the usual commodity price, terms-of-trade and relative interest rate reasons. The recently higher Australian dollar improves the investment metrics for Australians investing in American shares, but our dollar remains very weak against European currencies, thereby detracting from the investment case for that region.
Property Securities
The prices of listed Real Estate Investment Trusts (REITs) rose by 12.4% in the June quarter, a pleasing rebound from the prior period.
Sectoral performance was assisted by expectations of interest rate cuts, both domestically and in the United States. Lower interest rates generally reduce borrowing costs for REITs and can lead to improved property valuations and investor confidence. Valuations across the sector showed only marginal increases, largely in line with rent growth, as capitalisation rates remained relatively stable.
The industrial and diversified sectors well, notably a rebound in Goodman Group, the sector heavyweight and Charter Hall Group. Retail based REITs were also well bid including the majors Scentre Group (Westfield) and Vicinity and the regionals such as Charter Hall Retail and Region Group.
The retail real estate market continues to exhibit solid fundamentals with declining vacancy rates, increased mall footfall and strong tenant transaction activity. Consequently, capitalisation rates have moderated across the retail sub-sectors.
Conditions are still difficult for largescale developers such as Lendlease, constrained by high costs, and Dexus, which has struggled to retain some large third-party property investment mandates.
The expectation of further rate cuts in the second half of 2025 is a potential tailwind for REIT performance, improving broader business and consumer conditions, and potentially spurring increased office leasing demand and retail sales growth.
A feature of many Australian REITs is their transition towards managing property for third party investors and by consequence lessening their exposure to direct property ownership. This trend makes the stock market patterns for some REITs to be more akin to ordinary shares, as the asset management fee generating component of their typically stapled security structure is becoming a larger part of their overall business. It’s a competitive space, with REITs bidding against superannuation funds and other wholesale investment funds for these asset management mandates. Dexus, and more recently Mirvac, have been notably active in employing this strategy.
Interest Rates
Australia’s Reserve Bank reduced the official cash interest rate by 0.25% to 4.1% in February, then initiated another 0.25% reduction in May to 3.85%. The RBA then decided to pause at their July meeting, much to the surprise of the market that had been pricing in close to 100% likelihood of a cut.
The minutes of the RBA’s July meeting described their decision thus ‘the majority of members judged that the case to hold the cash rate target unchanged at this meeting was the stronger one. They believed that lowering the cash rate a third time within the space of four meetings would be unlikely to be consistent with the strategy of easing monetary policy in a cautious and gradual manner to achieve the Board’s inflation and full employment objectives.'
Looking forward, the market remains convinced (as we do) that the RBA will make at least one more interest rate cut this year, probably at their August 12th meeting then possibly again in early November. Markets are pricing a neutral (cycle bottom) rate of about 3%, which accords with the RBA’s prognostications, in the absence of any major global financial or geopolitical disruption.
Long-term bonds meanwhile have maintained their unusually tight trading range, between 4% and 4.6%. The lower end of this band would prevail in a disinflationary low-growth outlook, whilst the higher band would reflect some growth optimism. Higher rates may occur should markets fret more about refinancing stresses from governments with excessive indebtedness – think France, Japan and the USA for example. Thankfully, our government budget deficit and indebtedness, whilst sometimes reported on with gusto, is actually modest on an international comparative basis.
Long-term bonds meanwhile have maintained their unusually tight trading range, between 4% and 4.6%. The lower end of this band would prevail in a disinflationary low-growth outlook, whilst the higher band would reflect some growth optimism. Higher rates may occur should markets fret more about refinancing stresses from governments with excessive indebtedness – think France, Japan and the USA for example. Thankfully, our government budget deficit and indebtedness, whilst sometimes reported on with gusto, is actually modest on an international comparative basis
Looking ahead, we expect a forthcoming RBA rate cut to have a stimulatory effect, but the announcement might be coincident with the governments tax and productivity roundtable, an event that may engender much discussion about potential policy changes. The pattern of chaotic and unpredictable pronouncements from the US remains a key risk to short-term market stability.
Outlook
There will be plenty of global news and events to navigate in the coming months. Central Banks remain on diverging paths – Europe cutting rates, Japan raising and the US Fed procrastinating, to the chagrin of their President. US trade policy will remain problematic with threats and bluster in abundance. Tragic conflicts in the Middle East and Ukraine continue in the face of belligerence.
In Australia the reelected government will push its mandated agenda with vigour, so policy resets are likely, including probable amendments to taxation rules.
Australian interest rates should fall modestly which will be stimulatory for markets and consumers, though overall corporate profit growth will remain below trend. Shares therefore, should continue to be an appealing investment, but there is likely to be (as there was in the first half of the year) a second half correction downwards to watch out for.
The long-term investment outlook is improving as inflation wanes and the cost imposts of the Covid time dissipate, so those with a decent investment time horizon can invest with confidence.
Yours sincerely,
Malcolm Palmer
Joseph Palmer & Sons
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