Will an Interest Rate Cut Reignite Growth in the Stock Market?

Is the Reserve Bank of Australia (RBA) about to spark a market shake-up? This month, the RBA faces one of its most critical interest rate decisions in recent history. With inflation cooling and major banks like Westpac, ANZ, and CBA predicting a rate cut, all eyes are on the RBA to see if this move will reignite growth across the stock market.

How likely is it that the RBA will cut interest rates?

A rate cut not only feels likely—it seems essential. With inflation easing, the RBA has room to act decisively. Lower rates would make borrowing cheaper, stimulate spending, and potentially reignite economic growth—exactly what the economy needs right now.

The implications for the stock market, however, are complex. For example, bank stocks tend to thrive in a rising rate environment while struggling when rates decline. After thirteen consecutive rate hikes since May 2022, those same banks have emerged as some of the top performers on the ASX.

Therefore, rate cut this month could trigger a sell-off in bank stocks, but the outcome isn’t so black and white. Lower rates might actually boost financial stocks by driving economic activity and increasing credit demand.

Sectors likely to benefit from a rate cut

The real winners, though, are likely to be the Consumer Discretionary and Real Estate sectors, which thrive on lower borrowing costs. Investors would do well to start exploring potential opportunities in these sectors, particularly for quality companies trading at discounted prices.

So, with inflation under control and the need to spur growth, the RBA has a rare chance to make a meaningful impact. Therefore, if the RBA pulls the trigger, 2025 could mark the beginning of a new growth cycle for the Australian stock market.

What were the best and worst-performing sectors last week?

The best-performing sectors included Consumer Discretionary up 4.32 per cent, followed by Information Technology, up 2.59 per cent and Healthcare, up 2.56 per cent. The worst-performing sectors included Utilities, down 4.48 per cent, followed by Real Estate, down 0.43 per cent and Energy, down 0.05 per cent.

The best performing stocks in the ASX top 100 included Aristocrat Leisure, up 9.60 per cent, followed by Dexus, up 7.08 per cent and Telix Pharmaceuticals, up 6.57 per cent. The worst-performing stocks included Origin Energy, down 8.01 per cent, followed by NEXTDC Limited, down 6.60 per cent, and Iluka Resources, down 6.16 per cent.

What's next for the Australian stock market?

The All Ordinaries Index surged over one per cent last week, which saw buyers take the index to a new all-time high of 8,823 points. What's even more promising is that the market has finally broken free from the sideways trend it has been stuck in since October 2024.

Adding to the excitement, the market historically rises for about four weeks before encountering selling pressure. With only two weeks into a bullish wave following the recent low on the week ending 17 January, continued momentum could push the index to the significant 9,000 level, marking a key milestone.

Fuelling this recent rally is the strength of major stocks, but there's an interesting development gaining traction—the emergence of small-cap stocks. The Small Ordinaries Index (XSO) has seen stronger buying activity than the All Ordinaries Index (XAO) since the recent low on 17 January, climbing over five per cent compared to the broader market’s four per cent. This trend suggests increasing investor interest in smaller players, signalling market participation in the rally.

So, with momentum building in the smaller end of the market, it’s worth considering opportunities among emerging players which have a history of delivering staggering returns when they get going.

For now, good luck and good trading.

Dale Gillham is the Chief Analyst at Wealth Within and the international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the bestselling and award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good bookstores and online.