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Highlights
- ASX 200 tests record highs despite weaker corporate earnings outlook.
- Banking and industrial stocks drive ASX 200's price-to-earnings expansion.
- Global firms shift focus from Australian stocks to other markets.
The Australian share market, represented by the S&P/ASX 200 index, has seen a remarkable rally in recent months, but there are signs of caution as corporate earnings remain under pressure. Despite the index nearing its record high, with a 20% rise over the past year, many strategists are re-evaluating their positions due to concerns about future growth prospects.
The ASX 200 fell by 1.4% on Tuesday amid signs of profit-taking, leaving it just 155 points away from its all-time high. While this performance is impressive, especially compared to global counterparts like Wall Street’s 39% rally, experts are beginning to question whether the momentum can be sustained. Forecasts suggest zero earnings growth for 2024, and only modest growth is anticipated for 2025.
Banking and Industrial Stocks Drive Market Surge
The strong performance of the ASX 200 has been driven largely by bank stocks and the All Industrials sector, which excludes resources. Notably, Australia’s major banks, including Commonwealth Bank of Australia (CBA.AX), Westpac Banking Corp (WBC.AX), and Australia and New Zealand Banking Group (ANZ.AX), have played a key role despite showing little to no earnings growth over the past year. This has contributed to an increase in the price-to-earnings ratio from 14.4 to 18.3 over the last 12 months, well above the long-term average.
Some analysts, such as David Cassidy of Wilsons Advisory, have expressed concerns that Australian large-cap stocks are overvalued, particularly in the banking sector. He highlighted that all major banks appear stretched given their high valuation multiples but limited growth potential. Macquarie Group (MQG.AX), though viewed as expensive, stands out with a more positive earnings outlook.
Global Focus Shifts Away from Australian Equities
Global asset managers are also adjusting their portfolios, with US-based T. Rowe Price increasing its focus on US and Japanese stocks over Australian equities. The firm noted that Australia’s elevated stock valuations and subdued earnings expectations make it less attractive compared to other global markets. Furthermore, while a shift from banking stocks to mining stocks has provided some relief, concerns remain about the broader impact of China’s economic stimulus on commodities like iron ore.
The Australian market remains volatile, many investors are closely watching global economic trends and central bank actions to assess how they will affect the ASX 200 in the coming months.
