Australian equity markets are expected to have a cautious start to 2025, with rising bond yields and ongoing economic uncertainty likely dampening growth in the early part of the year, according to analysts at Macquarie. The analysts highlight that earnings rather than valuation multiples will be the key driver of returns after a strong 2024, which was buoyed by price-to-earnings (PE) expansion.
2024 Performance: Strong Gains but Fragile Market Sentiment
The S&P/ASX 200 index finished 2024 with a solid 11.4% gain, marking the second consecutive year of double-digit returns. However, the year ended on a weak note, with the index experiencing a 3.2% decline in December, largely driven by a spike in U.S. bond yields, which rattled investor sentiment.
Despite the strong overall performance, the market’s fragility was evident in December’s drop, signaling that the rally was not entirely stable and could face headwinds in 2025.
Investor Sentiment: Cooled but Still Optimistic
Macquarie’s FOMO Meter (Fear of Missing Out Meter), a gauge of investor sentiment, dropped to 0.91 as of the start of 2025. While this indicates that sentiment has cooled slightly, investors are still bullish on the overall outlook. The cooling of sentiment may reflect concerns about economic pressures and rising interest rates, which are likely to limit market gains in the first quarter.
Macquarie’s Outlook for 2025: Earnings Will Drive Returns
Macquarie analysts emphasize that in 2025, earnings will need to take the lead in driving equity returns, rather than relying on valuation multiples that played a significant role in boosting stock prices in 2024.
Tech Sector: The standout performer of 2024 was the tech sector, which saw a remarkable 48.5% total shareholder return (TSR), almost entirely driven by higher earnings. This sector is expected to remain a key contributor to returns in 2025, but analysts warn that investors should focus on companies with strong earnings growth potential.
Financials: Financial stocks were largely supported by PE multiple expansion rather than significant earnings growth, making them more vulnerable to market volatility in 2025. As interest rate cuts are expected to slow down, the financial sector may face headwinds in the new year.
Resources: The resources sector was one of the biggest underperformers in 2024, with a 14.9% slump. This decline was due to declining commodity prices and weaker demand from China, despite some intermittent rallies fueled by stimulus measures. The outlook for resources in 2025 remains cautious, with commodity prices continuing to play a major role in sector performance.
Gold: A bright spot in 2024 was gold, which benefitted from a 27% rise in global prices and strong central bank demand. This sector is expected to remain resilient in 2025 as investors seek safety amid economic uncertainty.
Sectors to Watch in 2025
Defensive Sectors: Staples and utilities showed resilience in December 2024 and could continue to be attractive in 2025 as defensive plays amid economic pressures. These sectors tend to perform well when there is market volatility or economic slowdown.
Real Estate: Real estate may face challenges in 2025 as expectations of interest rate cuts fade. As interest rates rise, the cost of borrowing increases, which could weigh on property demand and slow growth in the real estate sector.
Macquarie’s Investment Strategy
For risk-averse investors, Macquarie suggests waiting for a more opportune entry point into the market, potentially by March 2025. This allows time for market conditions to stabilize and for earnings reports to provide clearer insights into the financial health of companies.
In conclusion, earnings growth will be the primary driver of equity returns in Australia in 2025, with valuation multiples playing a secondary role. While there are reasons for cautious optimism, investors should remain vigilant about economic pressures, interest rate trends, and the performance of key sectors like tech, financials, and resources.
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