New highs and defying headwinds  

Despite navigating a challenging economic landscape over the past five years, global equity markets have demonstrated remarkable resilience. In 2024, major share market indices in both Australia and the US reached new highs, defying headwinds such as wars in the Middle East and Europe, elevated interest rates, and the prospect of trade tensions with Donald Trump’s return to the White House. 

The good news for equity investors in 2024 was the broadening of the rally beyond the technology sector. In Australia, the ASX 200 reached record highs later in the year, advancing 11%. While the ASX 200 financials index surged 34%, the materials sector weighed on overall performance, falling 14% amid concerns about Chinese economic growth that impacted major mining stocks. In the US the S&P 500 delivered an impressive 25% return, outpacing the Dow's 15% and shy of Nasdaq's 30%. Smaller US companies, as measured by the Russell Micro Cap Index, gained 14% after lagging behind larger companies over the previous two years.¹ 

Once again, the Australian market underperformed its US counterparts, primarily due to its limited exposure to technology. While the ASX 200 IT sector rose an impressive 50%, outpacing the S&P 500 IT sector's 38% gain, technology only represents 3.2% of the Australian index compared to a 33% weighting in the S&P 500.² 

The Australian market continues to grapple with its heavy concentration in financial and resource sectors, which limits diversification. By comparison, the S&P 500 boasts broader sector exposure, with six sectors — IT (33%), financials (14%), consumer discretionary (11%), healthcare (10%), communications (9%), and industrials (8%) — each contributing at least 8% to the index. The ASX 200, however, relies heavily on just three sectors: financials (34%), materials (19%), and healthcare (10%).² 

While equity markets have delivered above-average returns in recent years, strong earnings growth has been the foundation of this performance. In the US, the IT sector has been a standout, driving one of the strongest performances relative to the last 13 bull markets. Veteran Wall Street strategist James Paulsen notes that most other sectors have underperformed their historical averages during this bull market. Cyclical and defensive stocks have lagged, while small caps have posted the weakest relative returns compared to prior bull markets. A notable anomaly in this cycle has been subdued consumer and business sentiment, which could provide the momentum for continued positive returns as confidence improves.  

Promising potential in 2025  

The recent years underscore the timeless adage “It’s time in the market, not market timing, that counts.” The factors underpinning solid equity returns in the past remain relevant today and into 2025. While the future trajectory of returns will likely include bumps along the way, the drivers of company performance—earnings growth, innovation, and productivity—persist. 

We may be on the cusp of a significant productivity surge as AI integrates across industries and geographies. Of course, geopolitical risks, inflation, and economic growth remain unpredictable wild cards. Nevertheless, there are still opportunities to deploy capital in attractive businesses at reasonable prices, offering promising potential in 2025 and the years ahead.