Australia's 2025 equity returns hinge on earnings, not valuations - Macquarie

Australian equity markets are poised for a cautious start to 2025, with rising bond yields and economic uncertainty likely to dampen growth in the early months, analysts at Macquarie said in a research note.

They forecast that earnings rather than valuation multiples will need to drive returns after a stellar 2024, where gains were heavily supported by price-to-earnings (PE) expansion.

The S&P/ASX 200 index ended 2024 up 11.4%, marking the second consecutive year of double-digit returns. However, a 3.2% decline in December highlighted market fragility as a U.S. bond yield spike rattled investors.

“As we start 2025, our FOMO Meter has fallen to 0.91, which shows sentiment has cooled a little, but investors are still bullish on the outlook,” Macquarie analysts wrote.

Macquarie expects weaker housing growth and economic pressures to weigh on surprises early in the year, advising risk-averse investors to wait for a more opportune entry point by March.

Tech emerged as the standout sector last year with a 48.5% total shareholder return (TSR), driven almost entirely by higher earnings. In contrast, financials relied largely on expanding multiples for their gains.

Resources suffered a 14.9% slump due to declining commodity prices and weaker demand from China, despite intermittent stimulus-fuelled rallies. Gold was a bright spot, benefiting from a 27% rise in global prices and strong central bank demand.

Looking ahead, sectors like staples and utilities, which showed resilience in December, may continue to offer defensive plays, analysts noted. Meanwhile, real estate could face headwinds as rate-cut expectations recede.

Source: Investing.com