Elise McKay: What’s driving equities this week?

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE McKAY. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

THE market has taken some comfort in rhetoric emerging from Trump’s camp regarding negotiations for more favourable tariff outcomes – and refraining from firing Fed chairman Jay Powell.

As a result, last week – while a short one for us in Australia – was a good one for markets, with the S&P/ASX 300 up 1.9%, the S&P 500 up 4.6% and the NASDAQ up 6.7%, almost wiping out all the drawdown since Liberation Day on April 2.

The VIX (a measure of equity market volatility) also moved sharpy lower. However, the risk of a bounce in volatility and further equity sell-offs remains high.

Broad investor positioning, while improved, is still not great.

Neither we nor the market have sufficient conviction in the macro data to make a big call either way on the economic outlook.  

Complicating this further is a potential change in the global order and an end to the narrative of US Exceptionalism, leading to capital flow migration out of the US with subsequent effects for the US dollar (USD) and gold.

We saw this in the Aussie market last week, with anecdotal evidence that global asset allocation decisions are contributing to ASX 20 outperformance. 

US policy

The past two weeks have been characterised by classic Trump brinkmanship, leading to significant volatility as the market questioned the strength of US institutions. 

In a scene straight out of The Apprentice, Trump floated firing Fed Chair Powell on April 16. 

Markets took the news badly, effectively painting Trump into a corner and illustrating the market’s role as a moderating force on political overreach. By April 22 Trump had reversed course, stating that he had “no intention of firing Powell”. 

Tariff rhetoric developed over the past two weeks, adding to market uncertainty.

• While the sweeping Liberation Day tariffs (including 145% tariff on Chinese imports) were announced on April 2, the rhetoric sharpened further mid-month.
• On April 16 Trump warned that countries failing to finalise trade deals in the next 2-3 weeks would face new tariff measures and specifically singled out European autos as a potential target. 
• Meanwhile, China’s 125% retaliatory tariffs on US goods, implemented on April 11, remained in place. 
• By April 23, Treasury Secretary Bessent attempted to soften the tone, suggesting the trade war with China was “unsustainable” and hinting that some tariffs could eventually be negotiated lower (from 145% to ~50-65%). 
• European leaders also responded, publishing countermeasures against US tariffs on April 14, but pausing implementation for 90 days to allow negotiations. 

Overall, while no new tariffs were enacted over the past fortnight, heightened trade tensions reinforced volatility and amplified concerns over the global growth outlook.

Using the current “best case” scenario of 50-65% tariffs for China and 10% for the rest of the world, this would still equate to 16.5-18.5% blended tariff rate – or a US$480-540bn incremental “tax” on US consumers. 

Market positioning and flows

Amazingly, the S&P 500 is now only down 2.6% from Liberation Day, though it remains 10% below peak levels in February.

Volatility has also improved, with the VIX halving from the peaks seen post-Liberation Day.

That said, market breadth remains poor, with relatively few stocks driving the rebound.

Hedge funds remain highly active, with gross leverage above 200%. But a modest 47% net exposure suggests positioning is heavily relative rather than taking a directional view on markets.

This suggests we are still operating in an environment with elevated crowding risk and the potential for forced de-risking if volatility spikes again.

The potential impact of liquidity is evidenced in the S&P E-mini market. S&P E-minis are electronically traded futures contracts for the S&P 500, which is one-fifth the size of a standard S&P 500 futures contract.

Volumes of buy and sell orders at the best bid and ask prices are very thin, raising the risk that even modest order flows could drive sharp price swings. 

This backdrop has also driven hedge funds to lean more heavily on ETFs for hedging and risk management, amplifying the risk that macro-driven flows (rather than fundamentals) could dominate near-term market moves.

Anecdotally, long-only managers have been raising cash, though that started to shift last week as the selling of mega-cap tech slowed and there was some scattered interest in the Mag-7 following the results from Intel and Alphabet. 

Capital flows have also started to shift away from the US and into other global markets, shaping the trajectory for the USD and influencing the gold price. 

Within Australia, there is commentary around global asset allocators moving away from the US and into other markets – including Australia, where the ASX 20 has benefited and outperformed.  

Evidence of some more constructive flows was seen mid-last week, where hedge funds looked to cover shorts and bought single stock names. But this is still very early days and the fundamentals are unclear. 

We await greater certainty over tariff outcomes and earnings resilience to restore confidence in the market. 

Meanwhile, the retail buyer has not cracked and Corporate America should also start returning to the market this week with US$1.35 trillion authorised buybacks in place and an estimated $1 trillion execution for 2025 (up 5% year-on-year).

So, what are the fundamentals saying?

US earnings season has not been as bad as feared. 

About 35% of the S&P 500 have reported 1Q results with revenue growth of 4.9% and earnings up 20.6%, beating expectations. 

Forty per cent of market cap is reporting this week, including Apple, Amazon, Meta and Microsoft (we will be watching closely for readthrough for data centre demand from these “hyperscalers”). 

But earnings data is backwards looking, and it takes several months before we start to see the effects of tariffs flowing through. 

Historically, according to work by Goldman Sachs, the Philadelphia Fed Manufacturing Index, the ISM Services indices, jobless claims and the unemployment rate have been the most accurate and relatively real-time signals of growth slowdowns. 

In past recessions with a clear precipitating event – such as we saw with Liberation Day – it takes roughly three to four months for clear signs of deterioration to show up in the hard data, with surveys of expectations first showing signs of decline. 

While we are still in the first few weeks following Liberation Day, there are some signs that survey-based expectations have moved significantly lower.  

The Evercore ISI Company Survey – which looks to capture a real-time snapshot of economic activity and trends – came in at 48 last week, which is firmly in the “Struggling” zone of 45-50. Less than 45 is classed as “Recession.”

The decline was led by retailers and the capital goods sectors, suggesting the recent bumps relating to pre-buying ahead of tariffs have abated. Restaurants have also declined as consumers pull back on discretionary spend. 

Alternative data like the Freightwaves Outbound Tender Volumes Index (a measure of how often shippers request carriers to move loads) has trended down. Tender volume is now down about 15% year-on-year (YoY).

Ocean booking volumes out of China into the US are also currently down about 25% YoY. 

The Port of Los Angeles stated last week that it expects a 35% drop in import volumes in two weeks, “as essentially all shipments out of China for major retailers and manufacturers has ceased”. 

Meanwhile, shipping liner Hapag-Lloyd is currently observing an estimated 30% decline in bookings out of China and a surge in bookings out of South East Asia as importers look to build inventories before the pause on tariffs for the world ex-China ends in early July. 

The key conclusion on the macro situation – it’s complicated. 

Therefore, we take recent macro data with a grain of salt; we need more time to see how meaningful the effects of recent events have been on the economy. 

The Purchasing Managers Index (PMI) released by S&P mid-last week suggests a sluggish economy rather than one heading straight to recession. 

• The flash composite PMIs of 51.2 in April declined from 53.5 in March and was below consensus (52) but is still consistent with a growing economy. 
• And whilst businesses are more pessimistic about demand, they are also driving net employment growth with the employment index of 50.8 above the 12m average of 50.2.
• The output price index of the manufacturing survey at a 29-month high of 60.8 suggest the US is on track for core goods inflation rising from 0% in March to mid-3s. 
• In contrast, services sector inflation indicators were benign, within the 18-month historical range. 

The University of Michigan Consumer Sentiment Survey was weak, falling to 52.2 – the fourth lowest monthly reading since the 1970s. 

Existing home sales are at extremely low levels, dropping to 4.02m in March, versus 4.27m in the same month last year and below consensus expectations for 4.13m. 

The US housing market remains subdued, with new mortgage rates at 7% dwarfing that of average existing mortgage rates at around 4.3%. 

However, jobless claims remain in their recent historical range and continuing claims track sideways.

A changing world order?

With so much up in the air and markets still at risk of meaningful volatility events, this all begs the question: what has caused this change in the world order and how sustained will it be?

Since the GFC, the theme of US Exceptionalism has reigned supreme.

This is the concept that strong institutions, better technological innovation and a growing population have contributed to higher productivity, and superior US corporate profitability and GDP growth versus the rest of the world. 

This attracted global capital flows – foreign investors entered 2025 with a record 18% ownership of US equities. US equities have grown from 45% of global markets in 2008 to more than 70% today. 

However, this narrative has been challenged in 2025 by:

• Trump’s focus on fixing the fiscal deficit, which has reached 7%
• China’s potential threat to US technology dominance with the disclosure of DeepSeek’s AI capabilities
• An improved outlook for European growth following the election of a pro-growth German government. 

As Trump’s term has progressed and the tariff war has escalated, economies outside of the US appear increasingly attractive – and capital flows have followed. 

This – exacerbated by fears around the sanctity of Fed independence and of recession – has seen underperformance of the S&P 500 versus other key regions, a rise in US Treasury yields and a fall in the currency, with the US Dollar Index down 4.5% in April and 8.3% since the start of the year.

Goldman Sachs estimates that foreign investors have sold an estimated US$60bn of US stocks since the start of March.

The reallocation of capital away from the US has substantial implications for the USD and gold. 

Again, Goldman Sachs estimates that the USD is ~20% overvalued, with the real value of the dollar about two standard deviations above the average since it floated in 1973. 

We have only seen similar valuation levels in the mid-1980s and early 2000s, both which subsequently saw depreciations of 25-30%. The latter provides a helpful case study to understand how a global synchronised asset allocation shift away from the US can lead to a substantial devaluation of the USD. 

This suggests further downside beyond the depreciation we have seen to date. 

With an estimated $22 trillion in US assets owned by foreign investors, any widespread decision to reduce this exposure would likely contribute to significant additional dollar depreciation. 

The key takeaway is consistent with our long-held view that flows matter to markets. 

Australian equities

What does this mean for the Australian market? 

We are a potential net beneficiary of flows. We saw the S&P/ASX 20 outperform last week, up 2.5% versus 1.9% for the S&P/ASX 300 and up 0.3% for the S&P/ASX Small Ordinaries.

This is possibly an outcome from global asset managers reducing US equities exposure and upweighting global exposures, of which Australia is a beneficiary.

The gold sector has been volatile, reflecting concerns around geopolitical tensions and uncertainty, a weakening USD and still-strong central bank demand.  

Macro headlines and quarterly results were key drivers of this week’s stock specific performance. 

---

About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here