Earnings from Australian shares will continue to be muted into the next year as economic conditions remain weak, while leading sectors of the market have yet to overcome their own specific downturns, an Australian investment firm has noted.
Equity Trustees Asset Management head of asset management Darren Thompson pointed out while there are a number of global businesses based out of Australia, the national economy was more linked to domestic drivers and the flat conditions behind those will be reflected in the share market.
“The ASX 200 Index concentration in banks and resources means that earnings-per-share growth for fiscal year 2025 is now likely to be flat to down on 2024, with modest growth anticipated in 2026,” Thompson said.
“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.
“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 business. 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.”
He added much of the current strength in the share market has been driven by price-earnings-multiple expansion rather than earnings growth, which has resulted in stretched valuation metrics. As such, any good news anticipated for 2025 is already priced into market expectations so investors should expect muted capital returns and flat or lower income in the year ahead.
“Many sectors of the Australian market are expected to deliver earnings and dividend growth going forward. However, they are not of sufficient scale to compensate for the impact of the materials and energy sectors,” Thompson said.
“The impact of these factors is such that the Australian equity market’s 12-month forward dividend yield is around 3.4 per cent, which is 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.”
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