What a cash rate cut could mean for your portfolio

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Is the Reserve Bank of Australia (RBA) about to spark a market shake-up? Next 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.

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.

rba holds the cash rate at the final meeting of the year

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 13 consecutive rate hikes since May 2022, those same banks have emerged as some of the top performers on the ASX.

Therefore, a February rate cut 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.

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 are the best and worst-performing sectors this week?

The best-performing sectors include Consumer Discretionary, up more than 3%, followed by Healthcare up more than 2% and Communication Services up 1.5%. The worst-performing sectors include Real Estate, down more than 1% followed by Utilities and Energy, both down under 0.5%.

The best-performing stocks in the ASX top 100 include Aristocrat Leisure more than 7%, followed by SEEK Limited, up more than 6%, and Flight Centre, up more than 5%.

The worst-performing stocks include NEXTDC Limited, down more than 7%, followed by Goodman Group and Lynas Rare Earths, both down more than 5%.

What's next for the Australian stock market?

The All Ordinaries Index (XAO) surged more than 1% this week, closing the week so far just shy of its all-time high of 8771 points.

With such strong buying momentum, a breakout to a new high seems inevitable. 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 January 17, continued momentum could push the index to the significant 9000 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 since the recent low on January 17, more than 5% compared to the broader market's 4%. 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.

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Dale Gillham is chief investment analyst at Wealth Within Limited (AFSL 226347). He also serves as the head trainer at the Wealth Within Institute (RTO 21917). He has more than three decades of experience in the investment industry, and is the author of How to Beat the Managed Funds by 20%, Dale's qualifications include an Advanced Diploma and a Diploma of Share Trading and Investment. He co-hosts the Talking Wealth Podcast, and his work has appeared in The Australian Financial Review, New York Business Journal, Wall Street Select and more.