2025 Outlook | What's next for the most watched industries in Australia amid the potential rate cut?

The central bank announced on Tuesday that weaker-than-anticipated wages and economic growth data, released between its November and December board meetings, had reinforced its confidence that inflation is on course to return to the 2-3% target range. RBA indicated that it may lower interest rates as early as February, provided inflation and unemployment figures align with or fall below forecasts. Looking forward, Australian economy is expected to gradually recover in 2025. Rising wages and tax cuts are expected to drive real income growth, potentially boosting private consumption, while public demand will stay robust. Private demand could also benefit from monetary easing and a recovery in dwelling construction next year, although growth is likely to remain below potential until 2026.

Bloomberg data indicates that market analysts project real GDP growth is expected to rise to 0.6% in Q3 of 2025. The CPI will fall to 2.3% in the first half of 2025 but is expected to rebound in the second half of the year. The cash rate is projected to decrease by 10 basis points in the first quarter of next year, reaching 3.2% by the end of 2025. The unemployment rate is expected to gradually rise in the coming quarters, reaching 4.5% by the end of 2025.

The strong performance of ASX stocks in 2024 was mainly driven by fiscal support, expectations of a soft landing, the start of interest rate cuts by global central banks, and expectations of easing domestic financial conditions. Moomoo has identified the four sectors most favored by Australian users and will analyze their potential performance in 2025.

Looking back at 2024, the ASX Information Technology sector performed strongly, leading all sectors. ASX 200 Information Technology index has increased 50% year-to-date. Information technology shares have mainly been driven by the rapid pace of technological innovation and digital transformation, which fuel increased demand for IT services, particularly in key areas such as software development, data analysis, and cybersecurity. Additionally, the Australian government has been ramping up investments in critical areas like cybersecurity, artificial intelligence, and quantum technologies. This trend has enabled local Australian IT companies to capitalize on these opportunities and increase their market value.

As the largest constituents by market capitalization within the ASX 200, bank stocks have benefited from consistent inflows of passive investment funds, such as ETFs, and superannuation contributions in 2024, providing strong support for their share prices. According to the latest data from ABS, the superannuation sector currently holds nearly 30% of the free-floating bank shares on the ASX. The chart below highlights a steady increase in the superannuation sector's ownership of bank stocks in recent years. Additionally, multi-billion-dollar share buyback programs-either underway or soon to be implemented-have also contributed to the upward momentum of bank share prices.

2024 has been a disappointing year for iron ore investors, with prices falling from $136 per ton at the beginning of the year to around $103 per ton currently. In mid-September, prices dropped as low as $88 per ton, before being supported by a series of monetary and fiscal stimulus measures from China.

It is worth noting that China is currently the world's largest importer of iron ore, and the price outlook for iron ore is largely dependent on the economic performance of China. Looking ahead, Morgan Stanley notes that China's steel production has been slowing for several years, resulting in steel inventories now sitting at their lowest levels since 2019. This creates a restocking opportunity for iron ore. The bank has set a Q1 2025 target price of $105 per ton for iron ore, suggesting limited upside from current levels. CBA's commodities strategist, Vivek Dhar, stated that China may implement further stimulus measures in 2025 to support its economic growth. During the upcoming "Two Sessions" in March, China will set its annual economic targets, and it is expected that some related announcements could be made.

Small-cap stocks have shown a relatively subdued performance over the past year due to the high interest rate environment. ASX Small Ordinaries index, representing small-cap stocks, has gained 5.34% this year, underperforming the broader ASX200 index. Due to a supportive global stimulus environment and expectations of falling domestic interest rates, the conditions tend to be set for Australian small-cap stocks to outperform in the year ahead. As inflation eases, central banks in some countries have begun cutting interest rates, paving the way for accelerated liquidity injection into financial markets. Against this backdrop, President Trump's tax cuts and deregulation policies set to take effect next year are expected to stimulate domestic economic activity. Australian companies with overseas exposure—such as Life360, Propel Funeral Partners, and Orora—stand to benefit from the anticipated growth of the U.S. economy. With the RBA expected to cut interest rates in 2025, there tends to be a more favorable domestic macroeconomic environment, and a stronger earnings outlook for small-cap stocks compared to large-caps over the next couple of years is anticipated, leading to a more diversified performance across the index. According to Macquarie, Australian small-cap stocks are projected to achieve approximately 13% earnings growth in FY25, followed by around 9% growth in FY26.