CFS Quarterly Market Insights: AI fuels strong start to FY 2025-26

Jonathan Armitage

 

Welcome to CFS Quarterly Market Insights. So what we're going to do is have a bit of a recap of what has happened over the last quarter, talk about some of the reasons why, and then, talk a little bit about what's been on our minds as we look forward.

 

Let's start off by talking about the first quarter of the financial year, which has produced some very strong returns for members.

 

Al Clark

 

Yes, it has been. You're right. It's been a really strong quarter. It started with the One Big Beautiful Bill Act, if we can cast our minds back to that. The Trump administration wanted it released July 4, so that it had all the pomp and ceremony associated with that day.

 

That was way more expansionary than expected. So there was the tax cuts everyone expected, but there was none of the spending cuts. So that sort of set the tone for the rally for the rest of the quarter.

 

So we come out of Liberation Day with a strong rally in equities. That continued. So US equities have added basically another 8% this quarter, which has been really strong – led by tech again.

 

China's added 15% this quarter which is maybe slightly unexpected. Australia's lagged. Australia's probably only up 4%. So it's been a strong a strong quarter for most markets. But as I said, Australia not quite as strong as the others.

 

And then at the end of the quarter we saw the Fed easing. So we've got that policy support from the monetary side as well. So it was – it was a strong quarter across the board.

 

Jonathan Armitage

 

I think one of the features is that you've actually seen a bit more breadth in the market – that actually there have been a wider range of stocks which have been driving the outcomes for members and driving markets. It's not just been technology.

 

Al Clark

 

No it hasn't. You're right. So as I said, we saw China do 15%. So that's broadening out from a country perspective. From a sector perspective we saw small caps do quite well, so they outperformed the larger caps. But again, you know the tech stuff was pretty strong.

 

The quarter was punctuated by Oracle. September 10 – Oracle rallies 35%. Now for a company that's over $500 billion, I think that's historic. No company in history has ever rallied that much when they've been that size company – so 35% in one day. It's not all about the tech, but there's some strong tech.

 

Jonathan Armitage

 

So perhaps we should start delving into a little bit about why markets have continued to perform quite strongly. And one of the things that I think we should certainly touch on is valuation.

 

You talked about technology stocks. We have seen that small group of companies, which have been dominating certainly the narrative around markets for the last 12 to 18 months.

 

They produce good earnings, but their valuations have continued to expand as well.

 

Al Clark

 

Yeah they have, but you're right. They've continued to produce good earnings. There's two key reasons as to why the market continued to rally in the September quarter. One is policy support. So we talked about the One Big Beautiful Bill Act.

 

The monetary policies of Australia also eased in the quarter, it’s worth remembering. So the big one that everyone talked about was what was going on in the US. Australia eased in August as well.

 

So you’re getting monetary support – there's the first pillar for helping markets rally.

 

But the second one, and the most important, is what you're talking about which is the earnings. So they’re continuing to deliver really strong earnings.

 

The issue you face, and we've called this out before, is even though Nvidia delivered really strong earnings – and so it was again, 6% earnings growth quarter-to-quarter – that's way lower than it had been in the past.

 

So you've got these incredibly high valuations that require a price to perfection – require Nvidia to continue to deliver these amazing earnings. They weren't amazing – they were good.

 

Now the market's expecting more. They're expecting them to do even better. That's where we see some of the risk starting to crawl in.

 

Jonathan Armitage

 

And I think you highlighted that you saw that extraordinary performance from Oracle.

 

What you're also starting to see is a little bit of cross-shareholdings within the technology area as well, which also seems to have added a bit more to the momentum that you've seen in that part of the market.

 

Al Clark

 

Yeah, 35% in a day. What drove it was that (negotiation) with the contract in the future between open AI and Oracle – $300 billion over five years, that's an enormous number.

 

Open AI revenues this year are $12 billion. So they’re $60 billion a year – they're going to need to find a fair bit of cash to support this.

 

So that's probably the first question mark. But it did drive huge expectations for the build out of compute power over the next 5 years.

 

 Jonathan Armitage

 

I think you also highlight something that we've discussed a little bit, which has been that markets continue to look through some of the issues that, perhaps in other market environments might have seen a bit of a pullback; and that dichotomy between a company that only produces $12 billion of revenues, writing a check for $60 billion, at least in theory.

 

There is a little bit of a mismatch in that.

 

And I think it has been a feature that so far, markets have been responding more to policy, whether or not it's reduced interest rates or the Big Beautiful Bill, and particularly the tax benefits that have come through from that, and largely ignoring some of the challenges that continue to be a feature in the background, particularly around budget deficits.

 

Al Clark

 

Yeah. So you're right – earnings do look quite optimistic. And it’s probably worth calling out some of the risks.

 

That feels like the biggest risk – high valuations on what are quite high, and optimistic, we'd suggest, earnings base.

 

So those companies that we've talked about do feel like they're at risk. But there's some other risk creeping in.

 

And you highlight the budget deficit. Cracks are showing up in employment. So we had a really poor employment number in the US during the quarter.

 

You're also seeing inflation start to tick up as well. So that sort of stagflationary vibe is starting to creep into markets as well.

 

So it feels like optimistic earnings on top of a stagflationary vibe. It's not a great recipe for future rallies for the market.

 

Jonathan Armitage

 

I think. Yes. And I think that's one of the conundrums at the moment – that you've actually seen some of the macroeconomic data deteriorate, you saw the Federal Reserve cut interest rates, and there’s expectations that we'll see some further cuts coming forward.

 

But the challenge is that, as you pointed out, those inflationary numbers have been ticking up.

 

And if you look at what's being referred to as super core, which removes those very volatile bits of inflation – that's now back well above 3%, and that produces a bit of a conundrum for the US Federal Reserve.

 

Al Clark

 

Yeah. No, that garnered a lot of attention during the quarter. So the Trump administration not happy with the way that the Federal Reserve was positioning interest rates.

 

So they only reduced interest rates by 25 basis points. As you probably heard, the new appointee the Trump administration appointed to the Federal Reserve was asking for a 50 basis point cut and then expecting two more 50s.

 

So there is this tension going on between what's going on in the macroeconomic fundamentals, as you said, and the way the administration's expecting the Fed to behave.

 

So that garnered quite a bit of attention, and probably dragged us into that last risk we talked about quite a bit, which is this policy uncertainty.

 

The Trump administration has thrived on just keeping everyone on their toes and that political risk premium that we've talked about markets probably looking to put in – that happened again during the quarter with all this argument over the Federal Reserve independence.

 

Every time we do this, we highlight there's been another tariff come on. And then Friday, it was the 100% on patented pharmaceuticals and 25% on trucks.

 

So that risk feels like the other latent risk that’s not being appreciated, which is just this huge amount of policy uncertainty.

 

Jonathan Armitage

 

 

Yeah. And I think that that's something that we do continue to focus on from an investment perspective – that those risks have not diminished at all.

 

In fact, that policy uncertainty continues to be something that is very present in the background.

 

And so working through that – that feeds into why we've continued to be vigilant around some of the volatility that we think you might see in markets going forward and why we've continued to focus on building greater resilience into the way that we construct our portfolios.

 

And I think the message we would like to leave people with is that we're really building balanced portfolios – not ones which are dependent on binary outcomes from a policy perspective, or from a market perspective.

 

Thanks for watching CFS market Insights.