Australian equities are gearing up for a tentative beginning to 2025, with rising bond yields and economic uncertainties expected to dampen growth, according to analysts at Macquarie. After two years of double-digit returns, the S&P/ASX 200 index faces a more challenging landscape, marked by shifting market sentiment and sectoral divergences.

Key Insights

2024 Performance Recap

• The S&P/ASX 200 index ended 2024 up 11.4%, driven by price-to-earnings (P/E) expansion.
• December saw a 3.2% decline, reflecting fragility due to rising U.S. bond yields.
• The Tech sector was the standout performer, achieving a 48.5% total shareholder return (TSR), propelled by earnings growth.
• Resources struggled, falling 14.9%, weighed down by declining commodity prices and weaker Chinese demand, despite occasional stimulus-driven rallies.

2025 Outlook

Macquarie's Market Forecast

• Focus on Earnings: Analysts project that earnings, rather than valuation multiples, will drive returns this year.
• Investor Sentiment: Macquarie's "FOMO Meter" is at 0.91, indicating slightly cooled but still positive sentiment.
• Sectoral Strategies:
  • Defensive Plays: Staples and utilities, which showed resilience in December, may offer safety.
  • Challenges Ahead: Real estate could face headwinds as rate-cut expectations diminish.
  • Opportunities in Gold: Central bank demand and a 27% rise in global gold prices last year suggest continued strength.

Broader Context

Macroeconomic Headwinds

• Housing Market Weakness: Slowing growth in the property sector adds pressure.
• Economic Uncertainty: Persistent global headwinds may curb investor optimism, particularly in rate-sensitive sectors like real estate.

Sectoral Shifts

• The Tech sector is expected to maintain leadership if earnings growth continues.
• Resources, especially those linked to Chinese demand, remain volatile but could benefit from targeted stimulus efforts.

Explore Sector Metrics

For a deeper dive into sector performance and historical trends:

• Financial Growth API to analyze year-over-year sector growth.
• Ratios (TTM) API for evaluating industry-specific valuation metrics.
• Advanced DCF API to assess future valuation trends across key sectors.

Conclusion

The Australian equity market's trajectory in 2025 hinges on earnings performance amid economic uncertainty. Investors may benefit from defensive sectors in the near term while staying attuned to shifts in bond yields and global growth dynamics. For risk-averse participants, Macquarie suggests waiting until March for more favorable entry points.