October 2025: Share market rally becoming more fragmented

• Global equities continued to climb higher despite pockets of weakness.
• US cash interest rates decline for a second consecutive month.
• The Australian share market underperforms with renewed concerns over inflation.

International Equities

Despite the U.S. Government being in “shutdown” mode (because Congress failed to pass the required appropriation bills to fund federal operations), the U.S. equity market moved to new highs over October. Once again it was the technology sector that led the market higher, with the more defensively orientated consumer staples and financial sectors posting negative returns. However, results across the large cap U.S. technology sector were mixed, ranging from negative 11.7% for Meta (Facebook) to positive 15.7% for Alphabet (Google). The sell-off in Meta’s share price last month was indicative of some growing concern over the size of capital expenditure being made by technology companies as they attempt to build out infrastructure to support Artificial Intelligence applications.

The Japanese share market was the standout last month with the Nikkei 225 Index jumping 16.7%. News that the country had elected a new Prime Minister was viewed positively, with expectations that the new leader will be pro-economic growth and may expand government spending. Optimism around the impact of Artificial Intelligence (AI) and robotics on Japan’s industrial base also added to investor confidence, as did some weakening in the Yen last month.

There continued to be less momentum in European markets, with the German market advancing just 0.3%. The Chinese market also under performed, following two very strong months over August and September. China’s 3.9% market decline came despite trade discussion between the Presidents of China and the U.S., which resulted in an agreement to suspend, remove, or lower various components of previously threatened tariffs and trade restrictions. None-the-less, despite the agreement, U.S. tariffs planned to be imposed on imports from China are expected to average 47%, which represents a substantial increase on the rates applying in 2024. Outside of China, other emerging markets generally performed strongly with India advancing 4.4% and South Korea gaining 24.6% (due to surging demand for semiconductors and AI‑related products).

Global listed property declined by an average of 0.8%, despite the reduction in cash interest rates in the U.S. last month. There were, however, modest increases in Australian listed property and global listed infrastructure. Global listed property continues to be the lowest returning of the major asset classes over the past year, generating a gain of just 2.7%.

Australian Equities

A higher-than-expected inflation result for the September quarter (which saw the annual growth in the CPI jump from 2.1% to 3.2%) detracted from sentiment across the Australian share market last month. The S&P ASX 200 Index was just 0.4% higher for the month and now lags the global equity average return by 8% on an annual basis. Only the resource and energy sectors posted material increases. Although the iron price was flat and oil prices declined, increases in price across a range of other commodities, particularly base metals, added to investor support for mining companies. Following a stellar run, there was some moderation in the growth in gold mining shares, after the gold price fell from a mid-month peak to finish the month 3.3% higher.

Offsetting the gains in resources and energy were large declines in technology and consumer discretionary stocks. The sell-off in consumer discretionary stocks may have been associated with the higher inflation result and the possibility that it will slow the pace of any further interest rate cuts. The decline in the technology sector was led by a 23.4% decline in the price of Wistech, which experienced renewed concerns around corporate governance last month.

The Australian market performed slightly better than the global average in July, with the S&P ASX 200 Index rising 2.4%. In a marked turnaround in relative performance, healthcare was the strongest performer with a gain of 9.1%. CSL Limited (up 13.1%) was the main contributor to the sector’s gains. CSL’s advance appears to have come at the expense of the banking sector, with a rotation in support away from the Commonwealth Bank (down 3.7%) evident late in the month.

Resource and energy stocks were also well supported, with both oil prices (up 6.4%) and iron ore prices (up 4.9%) increasing investor confidence in these sectors. BHP Limited was a significant beneficiary, with the stock rallying 6.8%.

Fixed Interest & Currencies

With inflation higher than expected in Australia, there was no scope for the Reserve Bank to change cash rate settings following its Board meeting in early November. However, the U.S. Federal Reserve Bank followed up their September easing with another 0.25% reduction in the target cash rate, bringing the range down to 3.75% to 4.00%. Despite some firming of longer-term yields towards the end of the month, U.S. 10-year Treasury Bond yields fell slightly from 4.16% to 4.11%. There was an even smaller decline in Australian 10-year Government Bond yields, which were almost unchanged at 4.29%.

Commentary from the U.S. Federal Reserve associated with latest monetary policy change did indicate that the rationale for further interest rate cuts may be questionable. This “hawkish” view on interest rates did provide the U.S. currency with some support over the month (as higher interest rates make $US domiciled investments more attractive). As a result, the $A fell from US 66.0 cents to US 65.5 cents over the moth. However, the $A was stronger against the Yen by 3.9% and also 0.6% higher relative to the Euro.

Outlook and Portfolio Positioning

The rationale for the ongoing rally on global share markets appears to be coming under increasing scrutiny from investors. Unprecedented levels of capital expenditure to build Artificial Intelligence infrastructure and data centres will ultimately require corresponding revenue and improved profit margins to be justified. A 12% fall in the price Meta shares following an announcement of plans for further AI related spending perhaps reflects a renewed investor nervousness around the technology sector and the extent of committed expenditure and share price growth that has been witnessed over recent years.

Also potentially challenging the recent magnitude of share price growth in the technology sector is the possibility that inflation, particularly in the U.S., is proving to be stickier than previously expected. The U.S. has not reached its inflation target, with the current rate of 3.0% likely to have to fall before there will be any further reduction in interest rates. A higher-than-expected interest rate regime creates a longer and more challenging path from capital expenditure investment to profitable monetisation, which, all else being equal, should have negative consequences for share prices.

Although overall share price indices show elevated valuations, a feature of the current rally has been the extent to which some sectors and stock styles have been left behind. In the U.S., for example, the consumer staples sector (e.g. supermarkets) has risen by just 3.2% over the past year and the healthcare sector has posted slightly negative returns. Defensive, lower volatility and higher quality stocks have been ignored in the current cycle, which has made it difficult for active fund managers whose processes will lead them to these types of stocks as they become cheaper in relative terms. However, if there is a technology led correction on global share markets, these currently “unloved” stocks and sectors may provide an ideal safe harbour for relative outperformance. As such, investors should not assume that stocks or funds that have significantly lagged in performance over the past year will also be next year’s losers.

Domestically, we have already witnessed some evidence that momentum can rapidly reverse on past winners. The rotation away from the Commonwealth Bank that commenced in August has continued, indicating that when a stock becomes excessively priced there can be few supporters once the market starts to trend against it. Similarly, the recent sell-off across a range of domestic technology stocks highlights the fickle nature of markets – particularly when prices become detached from current day earnings.

With signs emerging that the equity market rally is becoming more fragile and fragmented, risks inherent in the recently better performing stocks and strategies are more elevated. By definition, this implies that risks provided by passive index-based approaches are also increased as they increasingly allocate to yesterday’s winners. Although intuitively challenging to execute, investment strategies that have a healthy exposure to areas of recent underperformance may prove to be the most rewarded in the months ahead.

 Important Information

The following indexes are used to report asset class performance: ASX S&P 200 Index, MSCI World Index ex Australia net AUD TR, MSCI World ex Australia NR Hdg AUD, FTSE EPRA/NAREIT Developed REITs Index Net TRI AUD Hedged, Bloomberg AusBond Composite 0 Yr Index, Barclays Global Aggregate ($A Hedged), Bloomberg AusBond Bank Bill Index, S&P ASX 300 A-REIT (Sector) TR Index AUD, S&P Global Infrastructure NR Index (AUD Hedged), MSCI China (Composite) in CN, Deutsche Borse DAX 30 Performance TR in EU. Hang Seng TR in HKD, MSCI United Kingdom TR in GBP, Nikkei 225 in JPY, S&P 500 TR in USD.

General Advice Disclaimer

Any advice contained in this document is of a general nature only and does not take in to account the objectives, financial situation or needs of any particular person. Any decision to invest in products mentioned in this document should only be made after reviewing the relevant Product Disclosure Statements. Past performance is not a reliable indicator of future performance. Varria Pty Ltd is an authorised representative of Charter Financial Planning ABN 35 002 976 294 AFSL number 234665