Where the Australian stock market is headed in 2025
There were massive winners and massive losers on the ASX in 2024. We bring you 2025 outlooks from three major brokers: Buy, hold or sell?
New year’s resolutions. You gotta love them! I will eat better, I will get fitter, I will save more, I will pay off that loan, I will invest in the stock market…Etcetera etcetera!
Well if you’re interested in that last point, then this is the article for you. We have the latest research from three of the biggest and most influential brokers in the business in Citi, Macquarie and Morgan Stanley. First up, we’ll wrap up their takes on the Australian stock market’s performance in 2024, then we’ll take a deep dive into their views and forecasts for 2025.
Whether you’re a seasoned ASX investor or just looking to get started, these insights will be invaluable in setting your new year investing goals. Let’s dive in!
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ASX 2024 report card
Citi – “Australian market weak in 2024”
- The Australian stock market lagged its international peers in 2024, with the price only return on the S&P/ASX 200 (XJO) trailing the MSCI AX World Index by 8.2%, and the S&P 500 in the USA by 15.9%
- It was a “tale of two cities” with Industrials rising 17.4% and Resources (Mining and Energy) falling 18.9%
- Banks/Financials were the largest contributors to overall index performance and Resources the largest detractor, strong performances were also recorded by Information Technology and Consumer Discretionary
- Banks performed “remarkably well” despite a “lack of fundamental earnings and dividend growth”. Citi puts this down to the “limited options available to large institutional investors across the ASX” as they attempt to invest more heavily in stocks more generally due to the “dislocating impact of excess inflation”
Macquarie – Gains due to FOMO, not fundamentals
- The XJO posted a total return of 11.4% in 2024 (December shaved 3.2% off this value!)
- Around 7% of the gains came from P/E expansion (i.e., price grew proportionally compared to earnings per share (“EPS”) = valuations deteriorated)
- Around 0.5% of the gains came from EPS expansion
- Around 4% of the gains came from dividends per share (“DPS”) expansion
- The best ASX sector in 2024 was Information Technology, up 48.5%, while Resources was the worst, down 14.9%
- Resources was one of the few sectors that say P/E contraction in 2024 (i.e., EPS grew proportionally compared to price = valuations improved)
- Large caps beat small caps by 3.3%
- Growth beat value by 16.6%
Morgan Stanley – 2024 was all about the Banks
- The XJO closed 11.4% higher in 2024, led by Banks and Information technology, while Materials dragged
- Banks accounted for 7.2% of the index’s total gains (broader Financials index 9.6%), while Materials detracted 3.6%
- The performance gap between Banks and Resources was a staggering 52.1%
- Australian equities returns ranked “poorly” relative to their international peers, partly due to the weaker Australian dollar (which fell 10.4% against the US dollar in 2024)
- Mid caps were the best-performing size segment of the market, rising 12.4%
- XJO forward P/E Ratio finished 2024 at 17.4x, down from 18.4x before December’s price decline. This is above the long term average of 14.7x and the 10-year average of 16.0x
ASX 2025 outlook and S&P/ASX 200 target
Citi – EPS growth will be “tepid”
Citi notes that its bottom-up expectations for the Australian share market in 2025 are for “almost flat earnings”, with what it describes as a “tepid” 0.5% aggregate EPS growth compared with broader market consensus for a similarly pessimistic 0.7%.
The broker notes it is also more bearish than consensus in Resources, with its forecast of -8.2% earnings growth worse than the -7.2% consensus estimate. Banks are likely to grow their earnings by 3.5%, with Citi ahead of consensus at 3.3%. Outside of Banks and Resources, the broader Australian share market is likely to see stronger growth, however, with Citi tipping 7.8% EPS growth ahead of consensus at 8.1%.
2026 is likely to be a more robust year for ASX earnings, with Citi tipping 7.0% earnings growth for the broad market, but this is behind consensus at 7.6%.
On Resources, Citi notes that valuations “have become more supportive”, but it cautions that “improved valuation metrics are not yet a green light for investors to dive back in”.
Citi pegs the current XJO forward P/E Ratio at 17.9x, noting this is substantially higher than its long run average of 14.6x. Share prices in 2025 are likely to be supported by RBA rate cuts, and the ongoing flow of money into superannuation funds (creating a source of “continual equity market flows”).
These factors combined will help the XJO reach Citi’s year end target of 8,600, although the broker tips the second half of the year is more likely to deliver the bulk of the gains on a “modest pick-up” in earnings.
Key risks for the Australian share market in 2025 are identified as:
- The uncertain macroeconomic backdrop remains
- Persistent demand-side concerns
- Geopolitical risks
Macquarie – Better time to buy when surprises trough
Macquarie notes their Fear of Missing Out (“FOMO”) meter has fallen to 0.91 after peaking at 1.29 in September. Macquarie equates a higher FOMO meter reading with excessive investor exuberance, and therefore with a potentially greater chance of market correction. “Sentiment has cooled a little”, suggests Macquarie, “but investors are still bullish on the outlook”.
Macquarie sees substantial risks in 2025, noting that the recent spike in long term market yields will likely drag on local economic growth. Housing will be particularly negatively impacted, it suggests, and “this will add to the negative delta in economic surprises in early 2025”.
Macquarie concludes “When you add uncertainty heading into Trump's inauguration, we still think a better time to buy risk will be near when surprises trough, likely delayed until March”.
Morgan Stanley – “The earnings gap must be closed”
Morgan Stanley notes that Australian shares continue to trade at “elevated” earnings multiples despite some “derating” since the early December peak.
Earnings multiples “are still elevated” and the broker sees only “flat” earnings growth for Australian shares in aggregate in 2025, and “modest single digit growth” over the next few years.
“The earnings gap must be closed before we can see more meaningful upside to our current 8,500 Index target”, Morgan Stanley concludes, noting that the upcoming earnings season will be critical in confirming earnings have troughed.
Morgan Stanley concludes by suggesting their clients move to “Overweight” positions in Energy and “Underweight” positions in Banks. Overweight positioning within Real Estate and Healthcare would likely also provide “added value”.
Key risks for the Australian share market in 2025 are identified as:
- Weakening aspects of the domestic economy
- Volatility in commodity-linked earnings
- Rising long term bond yields
- US monetary and fiscal policy paths
- RBA easing schedule (Morgan Stanley tips the first 0.25% rate cut in May)
- A lack of a post-election fiscal pulse
- A lack of continued China policy pivot (Morgan Stanley are prepared to “wait to buy the fact” rather than buy on what are largely so far only promises)
This article first appeared on Market Index on Wednesday 15 January 2025.
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Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl has a passion for technical analysis and has taught his unique brand of price-action trend following to thousands of Aussie investors.
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Investing is risky. Inevitably you will endure losses. If you can't cope with losing, don't invest.
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Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl...
Carl has over 30-years investing experience and has helped investors navigate several bull and bear markets over this time. He is a well respected markets commentator who specialises in how the global macro impacts Australian and US equities. Carl...
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