Markets look past rate uncertainty, as the AI trade heats up again.
While policymakers remain divided as to the outlook of interest rates, investors are taking a closer look at AI stocks once again.
One thing that became apparent last month is that global equities markets are demonstrating remarkable resilience, notching one record high after another, even in the absence of any rate relief.
It’s been discussed for some time now, both home and abroad, that central banks around the world are in the midst of easing monetary policy.
Yet for the most part, in Australia and the US, we continue to remain on hold. Even if we think we know the next move is lower interest rates, there remains great uncertainty as to the timing of said cuts.
In the United States, the situation is somewhat clouded by a number of factors.
Not only does this include a divided Federal Reserve, but it also extends to persistent tariff tensions, and mixed economic signals.
At the June Federal Open Market Committee meeting, the world’s most watched central bank underscored this divide. The minutes from said meeting indicated that while a slim majority of officials expected one or two rate reductions in 2025, other policymakers were warning against premature easing amid inflationary pressures.
When the Fed opted to keep rates steady, the result itself hardly came as a surprise. But beneath the surface, the divide in views certainly surprised a few observers.
Meanwhile, most economists acknowledge that there are inflation risks that remain on the table related to tariffs. In turn, this has complicated the rate cut outlook.
With the second iteration of the United States’ so-called ‘Liberation Day’, as well as a new suite of tariffs targeting the likes of metals and pharmaceuticals, uncertainty remains abundant.
Quite simply, even though consumer prices remain practically unaffected to date, investors don’t know if this will change, and perhaps even more of relevance, when it might change.
Nevertheless, despite these uncertainties casting doubt on the interest rate outlook, equities benchmarks remain particularly bullish.
US markets delivered strong returns through June, and as noted earlier, the key indices reset their all-time highs on several occasions.
Even if the aforementioned uncertainties remain unresolved, markets have instead latched onto a number of positive developments - namely, a robust labour market, corporate earnings prospects, as well as the resurgence of the AI trade.
Take the most recent jobs report for example. Through June, 147,000 new payrolls were added across the economy, and the unemployment rate eased to 4.1%. While that may be somewhat counterintuitive to immediate rate relief, the underlying story there still tells us that the labour market is displaying strength.
Meanwhile, on the corporate earnings front, the likes of UBS, Goldman Sachs, and even Bank of America have tipped strong earnings growth ahead of the upcoming reporting season. Naturally, the tech giants are the favoured cohort among the big banks.
But the third factor, concerning the AI trade, is the one helping markets push through rate uncertainty and knock down one record after the next.
AI boom broadens beyond Nvidia
For the best part of the last couple years, albeit with some exceptions earlier this year, AI stocks have become a highly-sought after category in light of the segment’s growth outlook.
For much of this time, the obvious flagbearer for the segment was Nvidia (NVDA), which has capitalised on the monumental windfall arising from the importance of its AI-optimised chips.
From time to time, we have also seen other players step up and generate significant traction and market interest as a result of the AI boom.
However, last month, this breadth reached what one might say was arguably the most diverse level since the AI boom first gripped markets.
As such, enthusiasm evolved from a singular focus on Nvidia into a broad rally that ultimately embraced both direct AI peers such as AMD, Broadcom, and CoreWeave, as well as technology-adjacent firms benefiting from AI infrastructure expansion.
In light of the broader headwinds we discussed earlier that are currently in play, this shift across the AI space would appear to reflect growing investor conviction that artificial intelligence is not merely the domain of a few high-cap companies, but rather a transformative wave impacting an expansive array of sectors.
Nevertheless, as far as the category frontrunner, Nvidia, the semiconductor giant hit fresh record highs, and has since become the first publicly-traded company to ever top US$4 trillion in valuation.
Elsewhere, Nvidia’s next biggest rival, Advanced Micro Devices (AMD), emerged from Nvidia’s shadow.
Following the release of its new Instinct MI350 series, the stock drew significant trading interest.
In our view, it seems pretty clear that AMD is looking to compete aggressively with Nvidia to get a stronger foothold in the data centre market where NVDA currently has a dominant position as far as AI-optimised GPU chips.
On the back of said price action, for the first time it seemed as though investors were pricing AMD not just as a competitor to Nvidia, but as a credible leader with its own AI growth narrative.
Another name benefitting from the breadth of the AI rally last month was Broadcom (AVGO).
As it stands, the company is starting to receive better recognition for its status as a full-stack AI infrastructure provider, deploying custom AI chips and networking solutions to hyperscalers, including the likes of big-tech - for example, Google and Meta.
We also saw CoreWeave (CRWV), a relatively new public company, gain significant ground with its valuation. The company has secured contracts with hyperscalers for its AI data centres, which tells us that companies supplying the infrastructure, be it physical or on the cloud, boast highly credible long-term growth prospects.
And following on from that, software and cloud providers at the heart of the AI transition also garnered increased investor attention, with one such example being Snowflake (SNOW).
Of course, big-tech, namely Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOGL), were all seen riding the AI wave as well.
But last month tells us that the AI trade may no longer be confined to core tech giants. Rather, this is a theme that could very well permeate enterprises across cloud orchestration, data analytics, and operational AI tools.
And with AI infrastructure spending only expected to continue growing, there is every chance that more companies are able to leverage future upside.
Portfolios Review: June 2025
Global equities continued their ascent through June, shaking off concerns about the global tariff landscape, an uncertain inflation outlook, and escalating conflict in the Middle East.
While the local market was supported by the Financials, Energy, and Materials sectors, the US market was almost single-handedly aided by the breadth of the tech sector, where returns far outpaced other cohorts.
Interest rate speculation saw Australia and the US on diverging paths, with many expecting a longer wait for rate relief in the US. However, the world’s largest stock market effectively shrugged this off in its stride.
At the end of the day, the overarching tone for June was positive, with tech leading the market rally to fresh highs. The sector’s impressive recovery from April’s flash crash emphasised its continued strategic and structural relevance in global equity markets.
In turn, our Portfolios, with the benefit of global equities exposure, handily outperformed the S&P/ASX 200 last month, with the exception of the Conservative Portfolio, where growth assets are modest.
On the back of said results, we also closed the gap for year-to-date returns against the same benchmark index.
Tech leads US gains, but a stronger Aussie dollar dulls returns for local investors
US holdings delivered windfall gains for each of our Portfolios through June, and it was no surprise to see the tech sector at the centre of this showing.
In particular, momentum was fuelled by segments such as artificial intelligence, software, and semiconductors.
Nevertheless, equities had to shake off a bout of volatility early in the month stemming from global trade tensions, and then the outbreak of war between Israel and Iran.
But as investors reoriented their attention to the growth thematics behind the aforementioned segments, there were strong returns for the likes of the Nasdaq and S&P 500.
We have exposure to these indices on account of holdings like the iShares S&P 500 ETF (IVV) and the Betashares Nasdaq 100 ETF (NDQ), among others.
Ultimately, it was AI‑centric chip-makers like Nvidia (NVDA), Advanced Micro Devices (AMD), Taiwan Semiconductor Manufacturing (TSM), and Broadcom (AVGO) that sustained the rally.
However, software stocks also provided substantive shelter from macroeconomic concerns. In some respects, this cohort offers less exposure to trade friction, thereby increasing its appeal ahead of another uncertain period where trade tariffs are again in the news.
Our growth-oriented Portfolios were the biggest winners arising from the performance of the tech sector, and this is because these Portfolios hold a significantly greater weight of funds in growth assets.
One thing worth noting is that a stronger Aussie dollar did dampen some of the returns we generated across our US holdings.
As it were, a rebound in the Australian dollar partially offset some of the underlying gains associated with our holdings like IVV, NDQ, and the VanEck MSCI International Quality ETF (QUAL).
After trading as low as 64 cents in May, the Aussie rallied back above 67 cents in late June, fuelled by stronger-than-expected local economic data and a more hawkish tone from the RBA.
As is the case with our Global Growth Portfolio, Australian investors should be mindful that an appreciation in the Aussie dollar against the greenback can trim Portfolio returns.
The potential for foreign exchange differences to impact short-term results should not be underestimated, even when underlying assets are performing well.
Nevertheless, at our disposal we do opt to simultaneously invest in hedged versions of two of our international holdings - the VanEck MSCI International Quality Hedged ETF (QHAL) and the Betashares Nasdaq 100 Currency Hedged ETF (HNDQ) - which provides us with some protection against currency movements.
ASX returns advance as the local market resets its all-time high
Last month saw the ASX exhibit steady performance marked by cautious optimism.
While the local market was also exposed to an early-month pullback on the back of conflict in the Middle East, this actually sparked a rally in certain segments, namely the energy sector, where oil and gas companies have largely been on the outer for months now.
Combined with growing hopes for an easing in monetary policy, the bank cohort did well as a group, albeit there were mixed results within.
Commonwealth Bank (CBA) continued to do most of the heavy lifting for this group, but last month it was also supported by Macquarie Group (MQG). On the other hand, the other three major banks lagged.
Still, with generally positive momentum behind some of the market’s biggest names, we saw healthy results for the likes of the Betashares Australia 200 ETF (A200), the Betashares Australian Quality ETF (AQLT), and even BKI Investment Company (BKI).
While the Reserve Bank of Australia has since shocked the market by deciding to maintain interest rates on hold at its July Board meeting, investors appear to have taken this decision in their stride.
In fact, no notable reaction was picked up, which suggests that the performance of the local market will continue to be shaped by offshore leads, namely out of the United States.
Hybrids excel despite growth assets trending, while short-term US Treasury yields fall short
Although growth assets were very much the flavour of the month, there was strong support for bank hybrids through June.
In fact, our Conservative Portfolio derived strong gains from this asset class, while other Portfolios also yielded helpful contributions.
It is likely that some of this enthusiasm was tied to expectations the Reserve Bank of Australia would cut interest rates at its July Board meeting, which as mentioned earlier, turned out not to be the case.
Whether this means we see a ‘normalisation’ in performance through July and August remains to be seen, but we would make note that the general outlook for interest rates is lower. Whether that be at the next RBA meeting, or further down the track, the borrowing rate will decrease, and we believe this will encourage income-oriented investors seeking favourable risk–return outcomes to consider hybrids.
The yields on these securities ensure they position themselves very attractively relative to the existing RBA benchmark, let alone once further cuts are delivered.
Last but not least, there was a notable drag on the Conservative Portfolio courtesy of the Vaneck 1-3 Month US Treasury Bond ETF (TBIL).
Booking a 2% decline for the month, this was largely a reflection of investor expectations of a gradual shift toward Federal Reserve rate cuts, with yield curves for this tenor remaining tightly clustered.
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