Markets – December 2025
Another month of underperformance wipes out nearly all gains for the financial year
Australian share investors are starting to ask, ‘What bubble?!’. Whereas most major share markets have had double-digit returns this financial year, shareholders in Australia have seen returns of less than 1%.
We covered the major causes of this last month, including the sensitivity many stocks have to the outlook on interest rates; the lack of exposure to tech stocks; extreme valuations in our banking stocks; and flat prices for our core commodities, especially iron ore, oil and gas.
2025-2026
An AI/tech bubble?
Not in Australia! Many of our top tech stocks have had a difficult start to the financial year. Technology One is down 32%; NextDC, one of our largest data centre operators, down 6%; Block, the owner of AfterPay, down 9%; and Megaport is off 6%.
Outside of our top tech stocks, many of our largest ASX companies have also disappointed. CBA is down 17%; James Hardie down 27%; Macquarie Bank off 14%; Woolworths down 5%; CSL down 25%; and Goodman Group off 14%.
As we approach a new year, investors are reviewing what took place over 2025 and what the outlook for 2026 might be.
2025 – It’s been a roller coaster year
It began with confusion and fear due to tariff sabre-rattling; a harrowing post-liberation day plunge in markets; the apparent end of US exceptionalism; a surge in the value of gold; and the dawn of one of the largest capital expenditure booms in history.
2026 – What comes next?
Valuations in most developed markets remain at near historic highs. In 2026 investors are likely to demand some proof of earnings increases to justify these high valuations.
Having endured three years of negative earnings growth, investors in Australian shares can expect to see an improvement in corporate earnings next year of around 4%, and in 2027 around 9%.
This improved earnings backdrop and a positive outlook for the global economy has analysts expecting a gain for the ASX 200 of around 10% over 2026.
Dividend yields are expected to be around 3.5%, which is below the long run average of 4.5%. This is because markets are at historic highs and corporate earnings growth has been negative for several years.
The worry list
The major concerns for investors in 2026 are:
- Share valuations remain stretched relative to their history, especially with US shares that offer little risk premium over bonds.
- The ongoing fear of a bubble in AI/Tech stocks and whether a suitable return on investment will be achieved on the billions being invested in AI infrastructure around the world.
- Movement in interest rates, especially in Australia, with analysts recently pivoting from a consensus view of rate cuts to rate rises in early 2026.
- The ongoing impacts and uncertainty of Trump’s policies on the US economy and consumers.
- The continuing slump in the Chinese property market.
- Geopolitical risks remain elevated as the trade war between the US and China intensifies.
- The ongoing high levels of government deficits and debt around the world.
… and the upside
2026 is likely to reward investors exposed to good quality stocks – those characterised by high return on equity, stable earnings growth, and low debt levels.
These stocks have been left behind over the last couple of years because tech stocks and the phenomenal returns they have generated have become the benchmark for all other stocks to emulate.
As a result, the Australian share market is seeing some of the highest quality companies listed on the ASX trade at valuations rarely seen since pre-COVID 19.
In 2026, good stocks that offer exposure to quality earnings trading on attractive valuation levels should rebound.
Office closure over the Christmas break
Our office will be closed for the Christmas holidays from today, December 22nd. We will resume normal business hours on Monday, January 5th.
We want to take this opportunity to express our heartfelt gratitude for your continued support throughout the year. It has been a pleasure working with you, and we look forward to serving you in the coming year.
Wishing you and your loved ones a Merry Christmas filled with joy, peace, and happiness. May this holiday season bring you warmth and cheer.
Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.
I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.
Russell Lees
Senior Adviser
Phone: +61 439 852 963
Email: russell@kauriwealth.com.au
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