Buying the dip

Equities have recently shown signs of fatigue. While headwinds persist, our Chief Investment Office believes a supportive backdrop remains for risk assets.

September has historically been a challenging month for equities. Since 1928, the S&P 500 has posted negative returns 55% of the time, with an average return of -1.2% for the month. As we enter September, the macroeconomic and geopolitical backdrop offers little to suggest this year will be different.

President Donald Trump has continued to exert pressure on public institutions, including the US Federal Reserve (Fed). His latest salvo – the attempted dismissal of Fed Governor Lisa Cook over alleged mortgage fraud – has raised further questions around Fed independence. This has contributed to a rise in long-term yields, with the 30-year US Treasury yield nearing 5%, a level that has historically unsettled both equity markets and the administration. For now, the move in the 10-year yield has been more contained, which should help limit short-term disruption. The short-end meanwhile has declined sharply, as markets move to price in a more dovish Fed, with an expectation that Trump-appointed governor Stephen Miran should also be voting by the September meeting.

Board composition aside, we believe the macroeconomic environment warrants a more accommodative monetary stance. US GDP growth was recently revised up to an annualised 3.3% for Q2, showing tariffs did not materially dampen growth in the first half. However, forward-looking indicators paint a more cautious picture. The August ISM Manufacturing Index edged up to 48.7 from 48.0 but remained in contractionary territory and below expectations. The ISM employment index rose modestly to 43.8, consistent with softer backward-looking employment data. Indeed, US payrolls grew at an anaemic average of only 35,000 a month from May to July, leading Fed Chair Powell to open the door to a September rate cut despite ongoing inflation concerns.

While the core personal consumption expenditures price index rose at a 2.9% annual rate in July, a 25-basis point cut appears prudent. Tariff-related price pressures have yet to fully materialise, but we expect these to result in a one-time increase in price levels, rather than a sustained rise in the rate of price increases. On balance, risks appear skewed toward the Fed’s employment mandate.

Although rate cuts would be a response to growth concerns, corporates have so far avoided significant pain. The year-over-year change in S&P 500 revenue versus costs has remained steady at nearly 2% over the past six months. Moreover, the estimated operating margin for the next 12 months has climbed back toward 18% – not far from its all-time high. This was reinforced by last month’s producer price index (PPI), which showed margin expansion as a key contributor to the PPI increase. Historically, when margins improve, equities tend to avoid substantial drawdowns.

That said, the outlook is not without its challenges. While equities have remained resilient, rate cuts appear timely – particularly for smaller corporates. Cash balances of S&P 500 companies as a percentage of total assets continue to decline, while interest expense as a percentage of debt remains elevated – around 7.1% for small caps and 4.4% for large caps. Although free cash flow among AI hyperscalers has begun to trend lower, these companies typically benefit from wide competitive moats, strong balance sheets, and structural tailwinds.

The Q2 earnings season reinforced their dominance, with EPS growth strongest in the Technology and Communication Services sectors. Looking ahead, Q3 earnings revisions for the S&P 500 have remained relatively flat at the headline level. However, this masks a divergence: estimates have been revised higher across Technology, Communication Services and Financials, offsetting mostly negative revisions across the rest of the index.

Big Tech surprised to the upside across the most recent earnings season

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Source: LSEG I/B/E/S, Strategas, ANZ CIO

So far, Q3 estimates paint a similar story

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Source: LSEG I/B/E/S, Strategas, ANZ CIO

Even so, Big Tech has not been immune to recent softness, leading the sell-off in late August as AI-behemoth Nvidia reported. Nvidia’s latest results were solid, but guidance fell short of expectations, and both revenue and earnings surprises have been declining since peaking in mid-2024. The market has been comfortable paying a premium to back tech leaders, but if the AI narrative falters, there is potential for further downside.

In such a scenario, we would expect a broader global slowdown and a pullback in US equities. While accelerated Fed easing may provide support, we would not be surprised to see additional backstops from the Trump administration. Furthermore, both equity positioning and investor sentiment – often contrarian indicators – have pulled back in recent weeks, suggesting there is still ample support for markets.

In our view, while the path forward is unlikely to be smooth, a combination of resilient corporate fundamentals, a more accommodative policy outlook, and supportive investor positioning creates a constructive environment for equities to grind higher.

What this means for our diversified portfolios

We took the recent share market weakness as an opportunity to ‘buy the dip’, increasing our position in US-tech related shares – our strongest sectoral bias within portfolios. Despite some investor nerves, we believe this segment of the market is well positioned to continue as the market-leader given the solid earnings profile, structural tailwinds and the fact it is not heavily reliant on a strong economy to grow profits.

Elsewhere within equities, we continue to position tactically across regions. European equities remain our preferred regional exposure, while domestic equities continue as our largest underweight. The recent Australian reporting season saw FY26 estimated EPS growth downgraded by more than 100 basis points. While directionally this is not unusual for the local bourse, it is above the historical average that is closer to 70 basis points. Coming out of reporting season the ASX 300 sits close to its all-time high and is trading at its highest multiple this century at roughly 20.5x forward earnings – up sharply from a still expensive 19.5x at the start of August.

Across defensive assets, we continue to favour duration. We position at benchmark to short duration but retain a mild overweight to long duration as a hedge against a sharper than expected slowdown in global growth.