Here’s a fair question: what just happened this week? The RBA cut rates, and our stock market went down! What gives? Meanwhile, ahead of Friday’s trading, the S&P 500 was up 0.94%, and that’s with a lot of Trump tariff uncertainty and the Fed saying inflation isn’t falling well enough to guarantee the two rate cuts Wall Street has been expecting.

When I saw this, I asked again, what gives? Then, the US answer seemed simple with corporate earnings better than expected and the Trump tailwinds of lower taxes, less regulation and tariff gains for local producers seemingly outweighing the headwinds of potential tariff inflation and his left-field decisions, such as his tirade against Ukraine’s President Zelensky, as well his goading of the EU over trade protection.

I then thought that maybe it’s simply complicated! However, Friday’s close made more sense with the Dow Jones index off over 700 points before the close, the S&P 500 down around 1.6% and the Nasdaq belted, closing off over 2%!

You could say reality was biting in the US with economic data on the last day of the trading week saying there was a 10% slump in the University of Michigan consumer sentiment index to a low 64.7 reading, and the fear of tariffs had pushed up inflation expectations of consumers.

Meanwhile, home sales fell more than expected and the Purchasing Managers Index dropped into contraction territory, and this was a day after Wal Mart had a weaker-than-forecasted outlook for its huge consumer-facing business.

This market reaction made sense with investors pondering whether the US will end up with a big slowdown, maybe a recession, and with inflation sticky?

In contrast, locally, the sell-off this week was simpler to explain. The RBA rate cut was a positive for stocks — rate cuts historically are good for share prices — but Governor Michele Bullock warned not to expect a rush of rate reductions and then the job numbers were too positive. Remember that bad job numbers would encourage more rate cuts, though on the other hand, it could be saying we’re not heading for recession, which is a plus for stocks.

Also not helping our stocks indexes was the rotation that the rate cut has started, with the likes of the banks and JB Hi-Fi losing ground, while smaller companies started to attract new money, as the stars and strugglers lists below shows.

On the plus side, takeover action for non-top 20 companies has also been a trend this week and note how as the ASX 200 index lost 2.26% this week, EX20 gained 0.27%, showing how the rotation helps many ASX 200 companies not in the top 20. To be fair, it’s early days for this ETF called EX20, but I bet lower interest rates over 2025 will help this investment to trend higher.

In simple terms, the rate cut has put us into a transition zone where the biggest market cap stocks such as CBA, JB Hi-Fi, the other banks and even Wesfarmers that reported well, all fell over the week. And because they’re big, they hit the index, but they mask the big gains for smaller companies, who in the end should push the index up when the big cap sell-off subsides.

(Once again, check out my ‘stars’ and ‘strugglers’ lists below to see some of the big gainers this week.)

In summary, the local market is likely to have a good year with rate cuts, takeover action and an improving China all bound to be tailwinds, while President Trump could be another tailwind for stock prices or a gale-like headwind if he picks too many fights on trade. That said, peace in the Middle East and Ukraine could be real pluses for share prices and economic growth.

In case you missed this on US companies, around 86% of S&P 500 companies have now reported December quarter profit results and they’re solid, with 76% beatings earnings expectations against a norm of 76%. Consensus earnings growth expectations for the quarter have risen to 12.8% year-on-year, which is up from 8.4% at the start of the reporting season.

Helping to explain a bit of the lower enthusiasm for stocks, even in the US, after listening to the CEO’s reports, earnings expectations for 2025 as a whole are being revised down. That’s the kind of uncertainty that can take the wind out of a stock market’s sail.

And it looks like the CEOs were being honest, with Friday’s economic revelations for Wall Street consistent with their forecasts for their companies. Not surprisingly, the related sell-off will hit us next week with the SPI futures tipping a 60-point fall at the start of trading on Monday.

You can bet that next week’s US economic data will be huge for stocks, with the latest economic growth reading and the Fed’s preferred inflation measure — the PCE index — both on show.

To the local story over the past five days, and the S&P/ASX 200 had a shocker, (losing 296.20 points or 3.03%) for the week, and you can blame the rate cut comments on Tuesday and the better-than-expected jobs report on Thursday, which might have some thinking it will be some time before we see another cut.

They could be wrong about future cuts, with plenty of economists still backing a May cut, while the CBA economics team continues to tip three more rate reductions by year’s end!

Not helping has been some disappointing earnings news from resources firms and the likes of NAB, with AMP’s head of investment strategy Shane Oliver also suggesting the Reserve Bank’s cautious commentary on the outlook for interest rates was no help for stock prices.

He thought the central bank’s wary comments on inflation and rates were “overdone” and he expects more rate cuts are coming in May and August.

To the ‘stars’ and ‘strugglers’ that moved 5% or more up or down this week:

To the ‘stars’…

1. Domain’s share price went through the roof on US takeover offer from CoStar, up 41.1% to $4.37.
2. Nine as the owner of Domain piggybacked up 15.33% to $1.72.
3. Mayne Pharma surged 28.34% to $7.20 on a US takeover offer.
4. Nanosonics shot up 31.78% to $4.52 on good results.
5. Telix was up again on a good report, rising 11.87% to $30.12.
6. A2M milked is at last up 14.26% to $7.77.
7. Star sparkled up 8% to $0.14 on a debt lifeline offer.
8. Judo banked a good profit, up 8.18% to $2.05.
9. Megaport delivered on my faith, up 25.96% to $11.21.
10. Telstra (TLS) spiked on its 5G upgrade, rising 7.65% to $4.15.

And the strugglers…

1. REA fell on the CoStar threat, off 12.02% to $236.18.
2. Spark loses spark on Kiwi recession, off 18.77% to $2.38.
3. JB Hi-Fi fell at last off 9.7% to $91.68 but what a spike it has had!
4. NAB made my banks call look right, off 12.89% to $35.08.
5. CBA too copped it, off 6.81% to $151.73.
6. Mineral Resources slumped 14.69% to $27.13.
7. Magellan looks lost, off 9.22% to $8.96.
8. Super Retail Group was sold off on poor results, down 15.1% to $14.
9. Guzman Y Gomez went south on a poor report, off 5.46% to $38.58.
10. News lost 6.45% to $51.40.

What I liked

1. The rate cut!
2. No new Trump tariff stuff.
3. This from AMP’s Shane Oliver: “Wages growth has slowed to 3.2% year-on-year, suggesting that the non-accelerating inflation rate of unemployment (NAIRU) is actually lower than the 4.5% the RBA is assuming.”
4. Around 86% of S&P 500 companies have now reported December quarter profit results and they’re solid,with 76% beatings earnings expectations against a norm of 76%. Consensus earnings growth expectations for the quarter have risen to 12.8% year-on-year, which is up from 8.4% at the start of the reporting season.
5. Japanese December quarter GDP came in stronger than expected.
6. Chinese new property prices fell again in January, but the rate of decline has slowed to a crawl. The worst could be over.

What I didn’t like

1. The stocks sell-off this week but it goes with the patch, with the selling off of big cap stocks always bound to take the index down in the short term.
2. The 44,000 jobs in January were more than expected and led to predictions of fewer rate cuts. The jury is out on this number and what it says about the economy’s health. Remember that unemployment did increase from 4% to 4.1%.
3. Australian business conditions PMIs for February rose slightly but remain soft.
4. Despite the issues at big banks and resources companies, company reporting beats are still running above misses, with 42% of results surprising consensus earnings expectations on the upside, which is just above the norm of 40%, versus 30% surprising on the downside, which is less than the norm of 41%.
5. Trump on Ukraine, Greenland, the EU and Zelensky.
6. Core inflation news overseas isn’t as good as I’d like. We need inflation to keep falling to permit more rate cuts to help global growth.
7. The Kiwi recession that meant the Reserve Bank of New Zealand cut its cash rate by 0.5% as widely expected, taking the rate to 3.75%.

Keep the faith

I’ve said on numerous occasions that a Trump-created stocks sell-off is always on the cards, but if it happens, all the other good stuff out there will see me tell you that this is a buying opportunity.

I have a lot of faith that lower rates will come and that will help the rotation trend we’re seeing here and in the US. Only a surprise Donald Trump decision and then a return fire reaction could undermine my positivity for stocks for 2025.

The US President could dog stocks short term but long term the dogs are barking that you should be exposed to stocks for the year ahead, but chasing dividends at the same time could add a smart bit of defence to add to your growth play.

“For the Australian share market, the historical experience tells us that the start of an easing cycle can be good news – providing there is no recession in Australia or the US.”