Much of the positive news expected for the 2025 calendar year seems to have already been priced into market expectations, according to Darren Thompson, head of asset management at Equity Trustees Asset Management.
In fact, Thompson believes investors should expect more muted capital returns, and flat or lower income over the next 12 months.
“The recent US election result and anticipated rapid adoption of President-elect Trump’s pro-growth agenda of lower taxes, deregulation, higher tariffs and larger fiscal deficits has further reinforced optimism regarding US economic growth outcomes for CY25 and CY26,” he said in a recent market note.
Outside of the US, Thompson noted that the economic picture is not as optimistic.
“In Australia, although we have some wonderful global businesses, economically, we are more leveraged to domestic drivers and a weakening China story than the stronger US economic thematic. Domestic economic conditions are, and likely will continue to be weak.”
Namely, the ASX 200’s heavy weighting in banks and resources means that earnings per share (EPS) growth for FY2024–25 is poised to be flat or even down on F23–Y24, with more modest growth anticipated for FY25–26.
“Share market strength has been driven by price-earnings (PE) multiple expansion rather than earnings growth, resulting in historically stretched valuation metrics and an arguably complacent assessment of embedded risks,” Thompson said.
Moreover, Equity Trustees anticipates that aggregate earnings in FY24–25 for ASX 200 stocks will be flat to slightly down relative to FY23–24, seeing as the outlook for both earnings and dividends for the domestic market is heavily weighted to the performance of banks and resources.
“Bank earnings are anticipated to be broadly flat due to a combination of modest credit growth, ongoing competition restricting net interest margins, ongoing cost pressures and already cyclically low bad debt provisions,” Thompson said.
“The primary driver of both earnings and dividends for the domestic market is the materials sector, reflecting the pullback in earnings and cash flows for BHP, Rio and Fortescue due to low iron ore prices.
“These companies remain highly profitable, cash generative businesses. It is simply that iron ore prices have continued to retrace from previous cyclical highs, largely due to lower demand from China for the reasons referenced earlier.”
While Thompson acknowledged that certain sectors of the local market will deliver earnings and dividend growth, he doesn’t expect this growth to be enough to offset the impact of the materials and energy sectors over the next year.
As a result, the Australian equity market’s 12-month forward dividend yield is around 3.4 per cent – well below the 10-year average.
“In aggregate, the outlook for near-term earnings growth remains weak. This does not seem consistent with the current level of market optimism and as such, we feel that capital returns over the next one to three years are likely to be more muted than those enjoyed in the last 12 months.”
Australia ranks as one of ‘least favourable’ among equity markets
In Morningstar’s 2025 outlook last week, APAC chief investment officer Matt Wacher noted that investing conditions in 2025 are set to be very different from 2024.
“Inflation has diminished, many central banks are loosening the reins on the economy, and formerly unloved assets have made a roaring comeback,” Wacher said.
This comes as equity markets globally continue their bull run, and so far show little signs of a correction.
“However, we expect returns from the US equity market to be lower compared with other markets while the Australian market ranks as one of the least favourable for investor opportunities,” Wacher said.
“It’s important to remind investors that valuations matter and always focus on the long-term,” he added.
That said, there are still prospects close to home. According to Morningstar equity market strategist Lochlan Halloway, opportunities in the small-cap segment abound as blue chips look extended.
“The divergence between large and small caps is stark,” Holloway said, adding that very few large caps trade at a discount.
Namely, the 20 largest stocks on the ASX, which almost account for three-fifths of the benchmark ASX 200 index, trade at a premium of 12 per cent to Morningstar’s fair value estimates.
“For small caps, almost a third of our coverage trades at a discount. If progress on inflation continues, and the Reserve Bank of Australia sticks a soft landing, we think this end of the market can do well,” he said.
