Criterion: The RBA might not lower rates again – but does it matter for shares?

• The historic inverse nexus between interest rates and share prices looks to be loosening
• The Reserve Bank looks done on rates for the time being – but the Federal Reserve doesn’t
• Likely rates movements aside, share valuations look toppish and vulnerable to US shocks

As 2025 closes out, share market bulls cannot rely on further domestic interest rate cuts to sustain valuations.

But do rates matter as much as the pundits presume? Over the last few years, equities increasingly have been running their own race.

Two weeks ago, September quarter inflation data showed inflation at an annual 3.2%, well above the June quarter’s 2.1%.

This kyboshed hopes of a Cup Day rates cut – the RBA held steady – and Thursday’s strong employment numbers rule out a pre-Christmas cut next month.

This week, deputy RBA governor Andrew Hauser also dampened expectations by referring to a ‘no further cut’ scenario as “more plausible”.

Still in spring racing carnival mode, he described the economy “as like a racehorse trapped against the course fence, unable to surge forward” because of capacity constraints.

Shares run their own race

A ‘no change’ – or higher – rates scenario may not knacker the share market as much as expected.

That’s partly because consumers are still enjoying the benefit of the RBA’s three rate cuts since February, totalling 75 basis points.

According to UBS, household spending is growing at 5.1%, above the 12-year average of 4.8%.

The firm’s consumer survey showed most respondents did not even factor in a further rate cut – and many of them expected to increase their spending over the next 12 months.

UBS says changes in demographics and “wealth effects” have “reduced the amplitude of policy rate cycles”.

“Combined with the fact that Aussie stocks are now generating a greater share of their earnings from overseas, the ultimate impact on Australian stocks from RBA policy has been lowered.”

Steady rates muddy the picture

The ‘no lower rates’ scenario would appear to be unhelpful to sectors including tech stocks, property trusts, consumer discretionary and highly geared infrastructure stocks.

Housing related stocks such as Mirvac (ASX:MGR), Stockland (ASX:SGP) and Brickworks (ASX:BKW) look like ones to avoid, too.

But providers with inflation-linked revenue increases such as energy retailers and toll roads might be better off.

The ticket-clipping Transurban Group (ASX:TCL), anyone?

As for the banks: it’s complicated.

In its September quarter update this week, the Commonwealth Bank (ASX:CBA) blamed an interest margin squeeze partly on falling interest rates.

This is at a time when depositors are getting wise and demanding higher rates.

But it’s a double-edged sword, because the rate cuts have improved consumer confidence.

Investors last week mauled Macquarie Group (ASX:MQG) – one of the most rate sensitive stocks – after a weaker than expected half year result.

The small caps sector generally benefits from lower rates, given their higher cost of funding and exposure to the rates-sector domestic economy.

The corollary is if rates don’t fall further, they won’t do as well as they have.

But it’s a rough-and-ready rule of thumb.

Heady valuations threaten Santa rally

At 3.6%, the RBA’s cash rate is around its average level over the past quarter of a century.

Since the RBA’s first cut on February 19 this year, the industrial sector has edged up around 5%, with financials rising 12% and mining 10% to the good.

Seemingly one of the biggest beneficiaries of rate cuts the tech sector has fallen 8.5% … so go figure.

Investors probably can live with the current middling rates setting.

“Don’t get overly bearish on stocks just because the RBA may be done [on rate cuts],” counsels UBS.

But another problem has emerged.

Rates aside, many investors fear the market is overvalued anyway – despite the ASX200 index retracting 4.5% from its October 21 peak.

Traditionally, the market enjoys a Santa rally.

But after this week’s market ugliness it’s beginning to look a lot like a correction is in order – more likely driven by a US economy showing the strains of the Trumpian uncertainties.

Federal Reserve chairman Jerome Powell says assessing US economic health is like driving through fog, given the impact of Donald Trump’s tariff blitz is yet to become apparent.

The Fed’s luminaries disagree on the need for cuts, with the narrative seemingly changing by the hour.

But if the US and Australia do diverge on their next rate movement, things will get even more interesting for both stock and currency markets.