ASX 200 Soars to Record Highs: Who's Leading the Charge? What's Next?

By the close of trading on October 15, the ASX 200 has surged 88.9% from its low point of 4,402.5 during the COVID-19 outbreak in 2020. This Bull Run has not been without its bumps, experiencing two corrections between August 2021 and June 2022, and from February to October 2023, with pullbacks of 16.0% and 10.8% respectively.

Over the past 12 months, the ASX 200 has impressively climbed approximately 18%, with 10 out of 11 sectors showing growth. Among them, Information Technology, A-REIT, and Financial sectors stood out, boasting increases of 56.6%, 40.6%, and 31.9% respectively.

According to Matt Sherwood, Head of Investment Strategy at Perpetual, the robust performance of the US stock market has significantly boosted markets like the ASX, which are facing challenges in earnings growth. He emphasized that investor confidence is high due to the sustained economic cycle and the recent rate cuts by central banks. Additionally, China's announcements regarding economic support have contributed to the positive sentiment, despite the lack of detailed plans so far.

Specifically, the main driving force behind the rebound has been the continuous rise on Wall Street. The S&P 500 index had already shown strong gains for five consecutive weeks, reaching a new high overnight. Previously, Wall Street analysts had anticipated that the third quarter would see the slowest earnings growth in nearly a year, with the expected profit growth of the S&P 500 index at only 4.3% compared to last year's increases of 9.8%, 13.1%, and 11.2% in the first three quarters of this year. This implies that the threshold for exceeding earnings expectations has been lowered.

Last week, major banks on Wall Street kicked off the Q3 earnings season, injecting strong confidence into the market with better-than-expected performance and early signs of bank profit recovery. Following this trend, Australian bank stocks rose on Monday. Additionally, the technology sector, led by chip stocks, made a comeback, with analysts predicting that fast-growing US tech stocks could maintain an upward trend with the support of interest rate cuts. Overall, as the dust settles after the November elections, market risk appetite is expected to improve, and some funds may begin to replenish their positions in US stocks, with analysts remaining optimistic about the year-end market outlook post the US elections.

Moreover, China announced a basket of stimulus measures that exceeded expectations at the end of September, particularly in terms of monetary policy. The significantly positive policy shift has ignited confidence and optimism in the recovery of the Chinese economy, subsequently driving up mining and resource stocks in the Australian market. Although the market felt that the lack of specific details on the scale of fiscal stimulus during the recent press conference by the Chinese Ministry of Finance led to a slight retreat in mining stocks, statements from top officials have indicated that other counter-cyclical measures and policy tools are still under consideration. The central government also has considerable room for debt issuance and deficit expansion. This suggests that the overall scale of fiscal stimulus may be more anticipated than ever before, with the focus now shifting to the implementation of China's policy stimulus measures.

Vanguard's global economics and markets team has projected a modest full-year economic growth of around 1% and anticipates the unemployment rate to increase to approximately 4.6% by the end of this year, up from 4.2% in August. The market is eagerly awaiting the release of Australia's unemployment rate data scheduled for this week.

Regarding interest rate adjustments, the Reserve Bank of Australia decided to maintain the official cash rate at 4.35% during its latest announcement on 24 September, a level that has been unchanged since the last rate hike in November 2023. Despite the gradual rise in inflation towards the Reserve Bank of Australia's target range of 2% to 3%, the RBA remains firm in its stance, indicating that it will take some time for inflation to be consistently within the target range. Consequently, most economists believe that a rate cut may not materialize until February or April 2025. However, Commonwealth Bank of Australia (CBA) stands out as one of the few institutions predicting the first rate cut by the RBA to occur in 2024. CBA stated, "All indicators we follow suggest that the disinflationary trend has gained momentum in the September quarter."

Gareth, the head of Australian economics at CBA, mentioned that the upcoming release of Australia's June quarter CPI data on 30 October will validate whether the trend of disinflation gaining momentum is indeed unfolding. He also noted that "All metrics they track point to a strengthening disinflationary trend during the September quarter."

According to the latest update of Macquarie's Australian Market PER, the PER for the current 6 months has increased to 18.5x from 17.8x one month ago. Looking forward to the next 6 months, the PER has also seen a rise, climbing from 17.6x to 18.9x compared to a month ago.