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Strap in, analysts warn, with markets set to ride volatility wave in 2025
As 2024 recedes in the rear-view mirror, the share market’s gains go into the past performance file and nothing about 2025 is guaranteed.
To recap, the share market – that is, the S&P/ASX 200 index – gained 7.5 per cent in 2024, or about 11.4 per cent with dividends included.
That is a bang on-target for the long-term average for the share market. Since 1926, according to Shane Oliver, chief economist and head of investment strategy at AMP, the total return (capital growth plus dividends) of the share market has run at 11.4 per cent a year.
There are statistical quirks to using indices. Over the long term, the survivors generate the returns, while the deceased companies disappear. And with increasing concentration, that return is only coming from a handful of stocks – the top 10 stocks in the S&P/ASX 200 account for almost half the index.
Yet given that these days you can buy the index through an ETF, that’s the return you would have got: the iShares Core S&P/ASX 200 ETF (IOZ), designed to track the S&P/ASX 200 index, earned its investors a 11.3 per cent total return in 2024.
What level of index return – also known as market performance – can investors realistically expect in 2025?
The index’s returns are driven by the share prices of its constituents, which are companies. These companies’ share prices are driven by three things: their earnings, how much the market is willing to pay for those earnings – measured by price/earnings (P/E) ratios – and the dividends some companies (not all) pay to shareholders out of earnings.
Many market watchers feel there is another driver – investor sentiment, or how the majority of investors feel about the likely direction of the index (the market), but even that translates into P/E expansion, when investors become convinced that the outlook for individual stocks is improving, and, as a result, they become more willing to pay more for a dollar’s worth of earnings in those companies.
This is closely tied to momentum where traders and investors buy stocks because they believe they are more likely to rise than to fall or trade sideways. Passive funds (such as index funds and ETFs that are designed to track the index) are responsible for much of this, because they are a simple, cheap way to buy the market.
With index funds now accounting for about 22 per cent of the S&P/ASX 200 ownership – up from 13 per cent a decade ago – this is a bigger force than ever. Daily, market prices are increasingly set by passive investment flows.
Market sentiment can turn quickly on economic data, geopolitical concerns, company news, legislative changes and if President Trump’s first term is any guide, the US President’s penchant for tweeting his thoughts. While many US businesses are optimistic about deregulation in Trump’s second term, potential concerns in 2025 certainly include how his policies on immigration and tariffs could play out, with rising yield prices on long-dated US bonds indicative of this.
All these factors go into producing stock (and thus, index) returns over a given period.
Nevertheless, the start of a new calendar year always has the strategists at the investment banks, broking and wealth management firms posting their targets for index performance in the new year, trying to work into their models share-price targets for the companies that drive the indices, based on earnings and P/E expectations, discounted cash flow (DCF) valuations and guesstimates for the effects of sentiment.
Oliver believes the 2025 ride could be volatile considering that the share market begins the year at an historically stretched valuation; the S&P/ASX 200 is trading at a P/E of more than 17 times forecast earnings, down from 18 times early in December, but above its historical average of 14.7 times earnings (for the past 10 years, 16 times earnings.) But he sees the index achieving 8,800 points in 2025, which would be a rise of 7.9 per cent – with a dividend return of between 3.5 per cent and four per cent (before franking credits) on top of that.
UBS strategist Richard Schellbach has an S&P/ASX 200 target of 8,850 points for 2025, implying a price return of 8.5 per cent.
Morgan Stanley equity strategist Chris Nicol has a 12-month price target for the S&P/ASX 200 of 8,500, for a 4.2 per cent price return. That is also the target of MST Marquee’s Hasan Tevfik.
In case these gains do not look alluring, JPMorgan’s Jason Steed sees the index retreating in 2025; his target of 7,900 points implies a 3.2 per cent decline, which would need the dividend return to put the total return into the green – a bail-out that has happened before.
In short, the message is to expect a choppy and volatile year for the market benchmark in 2025 with a single-figure percentage gain – and no guarantee of achieving even that.
