The Australian equity market in the 2025 financial year delivered resilient returns amid a complex backdrop of global geopolitical tensions and evolving domestic economic conditions. The following note outlines the drivers behind performance, risks and potential headwinds going forward.
Despite episodes of sharp selloffs in global markets, the ASX showed exceptional resilience, underpinned by Australia's relatively robust economic growth outlook.
Amid easing inflation, easing monetary policy and resilient corporate earnings, the market delivered strong returns in the 2025 financial year with the benchmark S&P/ASX 200 Accumulation Index returning +13.8% over the year (a combination of 10.0% growth and 3.8% income).
Returns were robust especially considering ongoing global volatility, geopolitical tensions, and global interest rate uncertainty. Australia’s equity market overall weathered global economic uncertainty and outperformed many of its developed market peers.
The market thrived amidst easing monetary conditions as the slowing of the pace of price inflation –contributed to the positive environment.
In broad terms, strong dividend yields, and defensive business models supported stock prices, especially through the periods of extreme volatility in October 2024 and April 2025 whilst several sectors proved to be the main drivers. The following sectors were the main contributors to overall performance.
Banking Sector
Technology and Growth Stocks
Commodity-Driven Resource Stocks
On the other side of the ledger, defensive sectors like healthcare, utilities, and consumer staples, along with some consumer discretionary names underperformed as investors rotated aggressively into bank and technology names.
Several themes were prominent over the course of the financial year and provide plenty of food for thought going forward.
The Financial sector continues to provide strong leadership headed by the banking sector which remains the key driver of market returns. The sector is supported by the current “quality and yield” thematic (investors cautiously waiting) although the valuation premium relative to their own history and global banking peers remains significant, particularly in CBA’s case.
Monetary easing, the RBA cut the official cash rate twice in the financial year. This benefitted rate-sensitive stocks such as financials, property, consumer discretionary sectors, and smaller companies.
Source: Bloomberg, Macrobond. As of July 2, 2025. See www.franklindatasources.com for additional data provider information.Focus on yield and defensive income from banks, select industrials, and utilities continued to attract investors seeking stable income in an uncertain global environment.
Elevated valuations, with Australian equities trading at elevated price-to-earnings (P/E) multiples compared to history and global peers, especially in quality & larger-capitalised stocks.
Geopolitical and Policy Uncertainty, with ongoing tension in global trade, US policy shifts, and geopolitical risk will continue to cloud the markets influencing both volatility and portfolio positioning.
Stretched valuations, as a key theme, Australian equities, especially banks and larger companies, are trading at elevated valuation metrics – price-to-earnings multiples have risen approximately +28% over the past year, well above historical averages. This creates vulnerability to any negative earnings surprises, especially if growth fails to justify high valuations or there’s a reversal in the momentum we’ve seen in the last twelve months.
Slowing earnings growth, corporate profit forecasts have actually been downgraded in recent months, making the market more reliant on continued optimism and re-rating rather than fundamental/organic growth. In earnings downgrade cycles, active stock selection becomes key as stronger companies separate from the pack.
Policy and interest rate uncertainties, while Australian and global rate-cutting cycles have supported risk assets, divergent global central bank policies, faster-than-expected return of inflation, or external shocks leading to higher rates, could create surprises and place downward pressure on market valuations. That said, the RBA rate cut path from here appears more accommodative than other countries, particularly relative to the USA and other countries who have already aggressively cut rates.
Global economic and geopolitical risks, uncertainty around global growth, especially from key trading partners (China, U.S., Europe), remains elevated. Trade, tariff, and supply chain disruptions as well as political developments could directly impact Australian exporters and investor risk sentiment. In contrast, any relief of these risks could see investor sentiment strengthen.
Source: Baker, Bloom & Davis. National Bureau of Economic Research. NAFTA is the North American Free Trade Agreement.To conclude, financial year 2025 saw the Australian equity market shaped and powered by bank sector outperformance, alongside select gold miners and growth stocks, interest rate cut tailwinds, resilient domestic demand, and foreign investors seeking safety and yield; in contrast to a rising need to be selective amidst rich valuations and evolving global risks, i.e. sector rotation and the continued search for resilient earnings.
The Australian market, and especially high-profile stocks, face risks from stretched valuations, slower earnings growth, global policy uncertainty, and sector concentration. These factors could lead to periods of increased volatility and means that prudent diversification and active management will become more important for investors going into 2026.
Against a backdrop of weakening global economic growth, unsettled trade outcomes, and heightened geopolitical risks, asset prices do appear stretched.
While we remain cautious in our outlook, a disciplined approach to asset allocation and diversification, means maintaining exposure to all asset classes, albeit at varying levels based on valuation – this will ensure limiting volatility and maximising returns.
The Investment & Research team at PSK are always monitoring market conditions and data points to ensure portfolios align with our overall long-term objectives. If you’d like to discuss any of the points raised, please contact your Adviser or call us on (02) 8365 8300.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it's appropriate to you, in light of your objectives, financial situation or needs.
