US and Aussie shares 'incredibly divergent': UniSuper

The artificial intelligence (AI) investment boom continued to drive US equity markets higher in May, while Australian shares delivered comparatively modest gains amid weaker earnings outlooks and pressure on the banking sector, according to UniSuper head of fixed interest David Colosimo.

Colosimo said US shares rose more than 5% in May, building on a 10% gain in April, while Australian shares gained less than 1%.

"US shares were up another 5% in May. That's very strong coming off the back of a 10% gain in April. But Australian shares were up just less than 1% in the month. It's really been an incredibly divergent performance in those last couple of months," Colosimo said.

"Australian shares, they're actually still 5% below their pre-war peak. You compare that to the US, shares there are at all-time highs and actually 8% above the pre-war peak. That rise in US shares was really relentless,"

The rally was underpinned by a stronger than expected US corporate reporting season, with first quarter earnings growth tracking at close to 29%, well above analysts' expectations.

"You really only see that sort of growth rebounding out of a recession when there's been depressed earnings," Colosimo said.

"But to see earnings growth so strong off what's an already high level, that's almost unprecedented."

Technology stocks remained the dominate force behind market gains, with the sector climbing nearly 16% during the month. Colosimo said earnings growth across the broader technology sector was approaching 60%, fuelled by surging demand for AI infrastructure.

"There's been a lot of scepticism over the years about the durability of the AI boom, but actual AI usage is now skyrocketing," Colosimo said.

The scale of investment is also accelerating combined capital expenditure from Amazon, Google, Microsoft and Meta is expected to reach US$715 billion this year.

"The markets really focussed on the shortage of compute rather than being worried about excess investment," Colosimo said.

While Australia has limited direct exposure to the AI trade, local mining companies benefited from demand for industrial metals required for data centres and chip manufacturing. BHP and Rio Tinto gained 16% and 11% respectively during May.

However, the Australian market faced headwinds elsewhere. Major banks fell between 4% and 7% following a disappointing reporting season, while several large cap companies including CSL, ASX and Brambles suffered sharp share price declines after earning downgrades.

"To me there are two other big themes in the Australian market... We did have bank reporting season early in the month, that was a bit disappointing. Then between rate hikes and those capital gains tax changes in the budget, they're both expected to weigh on bank earnings as we move forward," Colosimo said.

"The second one is that unlike in the US where analyst expectations of company earnings are still being upgraded, the earnings expectations for Australian companies in aggregate are now clearly in downgrade mode. We're seeing lower estimates for earnings. We did have quite a few big companies announce earnings downgrades during May."

Looking ahead, Colosimo said investors will be watching the expected June listing of SpaceX, which could become the largest initial public offering in history, as well as upcoming decisions from the Reserve Bank of Australia and the US Federal Reserve.

"I'm actually pretty confident [the RBA will] hold steady in June," he said. Colosimo noted there was some weak employment data with softer than expected inflation data, adding it may reduce the urgency for hikes.