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Investing.com -- Australian shares saw a significant rise in May, with the ASX 200 index increasing by 4.2%. This rebound represents an almost 18% recovery from the April low, following the announcement of a 90-day pause in reciprocal tariffs by the former U.S. President Donald Trump, which also included a pause for China in May.
Despite this recovery, Australian stocks underperformed in comparison to global equities in May, with the S&P 500 index rising by 6.5%. It’s worth noting that Australia had shown stronger performance in April, often considered a safe haven during times of volatility. The Australian market also has less exposure to the tech sector, which was the main force behind the global equity rally.
The gains in May were primarily driven by PE expansion, which contributed 4.2ppt to returns. A slight 0.4ppt fall in earnings per share (EPS) was balanced by an equivalent rise in dividends. Following this rally, the forward price-to-earnings ratio (PER) for the ASX 200 stands at 18.8x, matching the highs seen after Trump’s election victory in November 2024.
The technology sector emerged as the best performer, with an increase of 18.8%, bolstered by strong earnings updates, a resurgence in the AI trade, and rate cuts by the Reserve Bank of Australia (RBA). Life360 led the sector with a 51.9% increase, while TNE, WTC, XRO, and NXT all saw double-digit gains. Despite a flat gold price, the gold sector also performed well (+10.5%) due to continued earnings upgrades.
On the other hand, defensive sectors struggled in line with the market rally. Utilities saw the smallest growth (+0.3%), followed by Staples (+1.2%) and Health (+1.4%). Among cyclical groups, Consumer Services experienced the most significant fall at 3.3%, driven by earnings downgrades. IEL and ALL were the main contributors to this group’s decline.
Momentum saw a significant resurgence, with a 6.2% increase, reminiscent of the 2024 market conditions. One key example is PME, which rose 22.9% last month and is up nearly 80% since its April low. Growth had a slightly weaker return than Momentum at 4.9%, but still significantly outperformed Value’s 2.3% increase. The gap in the U.S. market was more pronounced, with Growth outperforming Value by 7.4ppt in May.
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