Q2 2025 Market Review: Tech rally, bank dividends, and what we're watching next

The second quarter of 2025 delivered a reminder that markets reward patience and punish prediction. After a cautious start to the year, Australian and global equities rallied strongly through April and May, driven by a resurgent technology sector, resilient bank earnings, and growing confidence that the RBA's tightening cycle has well and truly peaked.

Here is our review of the key themes from Q2 2025 and, importantly, where we see opportunity and risk heading into the second half of the year.

ASX Performance: A Strong Quarter

The S&P/ASX 200 gained 5.8% over the quarter, finishing June at 8,340 points. This marks the strongest quarterly performance since Q4 2023 and brings the index to within touching distance of all-time highs. Broad-based participation was a healthy feature of the rally — unlike 2024, where returns were heavily concentrated in a handful of names, Q2 2025 saw gains spread across most sectors.

Total return (including dividends) for the ASX 200 year-to-date sits at approximately 8.2%, comfortably ahead of long-term averages and reinforcing the case for staying invested through periods of volatility.

The Tech Rally: Real Earnings, Not Just Hype

The standout sector in Q2 was technology, with the ASX All Technology Index surging 11.3% over the quarter. Unlike previous tech rallies that were fuelled largely by sentiment and speculative positioning, this move was underpinned by genuine earnings growth. Several ASX-listed technology companies reported strong half-year results, with recurring revenue growth, improving margins, and upgraded guidance.

Key contributors included enterprise software businesses that have been benefiting from the accelerating adoption of AI-enabled productivity tools across corporate Australia. Payments and fintech companies also performed well, as transaction volumes continued to grow above expectations.

Globally, the Nasdaq composite rose 9.2% in Q2, led by the "Magnificent Seven" cohort — though the breadth of the US tech rally improved meaningfully compared to 2024, with mid-cap software and semiconductor names participating strongly.

"We have been gradually increasing our technology allocation since late 2024. The sector is no longer trading on hope — the earnings are real, and the businesses generating them are increasingly profitable."

Bank Dividends: The Quiet Performer

Australia's major banks continued to deliver what they do best — reliable, fully franked dividends. The big four (CBA, Westpac, NAB, and ANZ) all either maintained or modestly increased their interim dividends, reflecting stable net interest margins and benign credit conditions.

CBA remains the standout, trading at a premium-to-peers valuation that shows no sign of narrowing. Its share price touched $140 during the quarter, a level that would have been unthinkable three years ago. While the valuation is stretched by historical standards, the market is pricing in CBA's dominant retail banking franchise and best-in-class technology platform.

For income-focused investors, the major banks continue to offer grossed-up dividend yields of 5.5–7.0%, making them a cornerstone of Australian retirement portfolios. The key risk remains a deterioration in credit quality — but with unemployment holding at 4.1% and house prices stable, that risk remains contained for now.

Resources: A Mixed Picture

The resources sector was the laggard of Q2, with the ASX 300 Metals & Mining index flat for the quarter. Iron ore prices drifted lower through April and May, settling around US$100 per tonne as Chinese steel production data disappointed. BHP and Rio Tinto both gave back gains from earlier in the year.

The bright spot was lithium. After a brutal 2023–2024 where prices fell more than 80% from their peak, lithium carbonate prices stabilised in Q2 and showed early signs of recovery. Supply discipline from major producers, combined with continued growth in global EV sales, is starting to rebalance the market. We are watching this space closely but have not yet added exposure — the recovery needs further confirmation before we commit capital.

Gold was the other notable performer, with the AUD gold price reaching all-time highs above $3,800 per ounce. Persistent geopolitical uncertainty, central bank buying, and a weakening US dollar all contributed. Our portfolios have maintained a modest gold allocation (via ETFs and selected gold equities), and this positioning has been a meaningful contributor to returns this year.

Global Markets: The US Leads, Europe Steadies

The S&P 500 rose 7.1% in Q2, bringing its year-to-date return above 14%. The US economy continues to defy predictions of a slowdown, with GDP growth, employment, and consumer spending all holding up. The Federal Reserve held rates steady at 4.75–5.00%, but the market is now pricing in two rate cuts before year-end — a shift from the "higher for longer" narrative that dominated early 2025.

European markets posted solid gains of 4.8% (Euro Stoxx 50), driven by improving manufacturing data and a more constructive outlook for corporate earnings. The ECB cut rates by 25 basis points in June, its second cut of the cycle, providing further support.

Asian markets were mixed. Japan's Nikkei rose 3.2%, supported by continued corporate governance reforms and a weak yen. Chinese markets were essentially flat, as stimulus measures disappointed and property sector concerns lingered.

What We're Watching in H2 2025

As we move into the second half of the year, several themes will shape our portfolio positioning:

• RBA rate path: The market expects one more cut in 2025, likely in August or November. Lower rates would support equities broadly but particularly benefit rate-sensitive sectors like REITs and small caps.
• US election cycle: With the November presidential election approaching, market volatility typically increases from September onwards. We are reviewing hedging strategies and considering slightly more defensive positioning as we enter Q4.
• China stimulus: A meaningful fiscal stimulus package from Beijing would be a catalyst for resources and the Australian dollar. We are maintaining modest resources exposure to capture upside if this materialises.
• Earnings season: August reporting season will be the next major test for Australian equities. Consensus expectations are for mid-single-digit earnings growth, which feels achievable but leaves little room for disappointment.
• AI and productivity: The second-order effects of AI adoption are beginning to appear in corporate earnings. We are monitoring which companies are genuine beneficiaries versus those simply riding the narrative.

Portfolio Positioning

Our model portfolios remain positioned for moderate growth with a bias toward quality and income. Key tilts include:

1. Slight overweight to Australian equities relative to global, reflecting attractive dividend yields and favourable currency dynamics
2. Increased technology allocation through a blend of ASX-listed tech and global technology ETFs
3. Selective bank exposure, favouring NAB and Westpac over CBA on valuation grounds
4. Modest gold allocation as a portfolio diversifier and geopolitical hedge
5. Underweight fixed income duration, as we expect the yield curve to steepen if rate cuts materialise
6. Cash buffer maintained at 5–7% for tactical opportunities during any H2 volatility

"Markets don't move in straight lines. Q2 was generous, and we should not expect every quarter to deliver these returns. But for long-term investors with a well-structured plan, staying invested continues to be the winning strategy."

The Bottom Line

Q2 2025 was a strong quarter for balanced portfolios. Technology led the charge, banks delivered reliable income, and global markets broadly participated. The risks heading into H2 are real — geopolitical uncertainty, election-year volatility, and the potential for earnings disappointment — but they are manageable within a diversified, goals-based framework.

If your portfolio has not been reviewed since the start of the year, now is a sensible time to ensure your asset allocation still reflects your goals, time horizon, and risk tolerance.