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Australian equities have materially lagged global peers, both year to date and over longer-term horizons, returning 4.4% over the past twelve months against 20.4% for global shares1. Australia’s lack of direct AI beneficiaries, partly offset by the related resource rally, has left most of our domestic market looking limp in the face of supercharged earnings and returns overseas.
The Australian market entered 2026 on the back of three consecutive financial years of negative earnings growth. So, a reported 11.9% growth rate for FY26 is something to rejoice in2. Materials are by far the biggest contributor to this turnaround, exclude the sector and the market would have grown just 3.4%3.
Dr Copper replaces Chinese medicine for Australia’s resources sector
Led by BHP and Rio’s strategic pivots Australia’s materials sector is much less reliant on iron ore than it once was. BHP’s FY26 result in August confirmed copper at 54.2% of segment earnings against iron ore’s 43.3%4, the first full year copper has been the majority, while Rio reported in late July revealing their copper earnings were up 84% year on year and now just behind iron ore earnings5.
The surging copper price, related to the green energy transition and AI buildouts, has therefore been a significant positive contributor to the sector’s performance, alongside a gold price that rallied 9.5% through the season, albeit still below early year record highs. Gold miners, now 5.7% of the ASX 200 and a larger slice than the entire energy sector, rose 28.6% in August6, so this bodes well for the Australian market so long as these commodities maintain their value.
Budget woes for the Big 4 mortgage hose
Australia’s other majors, the big banks, are not faring as well. They fell 7.4% through August while their FY27 earnings estimates were cut just 0.5%, a de-rating rather than a downgrade7.
Since the GFC international banks have diversified into higher-growth businesses including payments, capital markets and wealth management. These global peers are seeing historic growth and profits.
Australia’s Big Four took a different path. They simplified, exited adjacent businesses and doubled down on home lending, a mature market now facing fresh headwinds following the Federal Budget’s tax changes.
Australian financials sit near a twenty-three-year valuation extreme, in the 95th percentile of that history8. It is however worth separating the cohort, as CBA still stands out as expensive.
Australian earnings resume their downtrend on a challenged outlook
Turning to the remainder of the market, the forward view has deteriorated since the Federal Budget. The FY27 earnings estimate for the Australian market has fallen by 2.9% in total. Communication Services is down 2.9%, Consumer Discretionary 4.0%, and Health Care 11.1%. Financials sits effectively unchanged while Materials, the sector that carried FY26, was cut 8.8% through the earnings season itself as input costs climbed while commodity prices held9.
The consumer is the part of this that reads as a genuine domestic signal. Its cuts were largely in place before the season began following the budget, yet investors still punished companies well beyond them. JB Hi-Fi reported record sales and a higher full-year profit, saw its forward earnings trimmed 4.4%, and fell 12.3% on the day and 16.8% over the month, taking Harvey Norman, Premier and Wesfarmers down more than 4% with it10. Wesfarmers was upgraded and still lost 11%. Where estimates did fall, earnings came down roughly twice as far as sales11, a margin story rather than demand.
It must be noted that not all of these downgrades belong to the Budget. Utilities downgrades reflect retailers absorbing lower power prices. Health Care’s cut is almost entirely CSL, a global earner. Dividends and buybacks held up better than earnings did. Nevertheless, the ASX 200’s 4.7% gain since the federal budget has come from a re-rating higher rather than any earnings upgrades, with the market’s price up 3.2% through the season while forward earnings fell 3.0%12. In a season that paid for guidance over results, that leaves little room for disappointment.
Investment implications: How to navigate the challenged Australian equity market
Anecdotally we have been hearing from clients that the Australian equities portion of their portfolios has become the most challenging to manage. The data on recent active manager performance supports this.
Over the past 6- and 12-months the Australian equity active manager cohort, weighted by funds under management (FUM), has underperformed our broad market Australian equities index ETF, A200 Australia 200 ETF, by 3.8% and 2.3% respectively13. The monthly return dispersion of these managers is the widest in nine years14, picking the wrong manager has rarely been costlier.
Over the same period our passive Australian quality and value factor ETFs have both outperformed A200 as well as a majority of active managers with the same style biases as defined by Morningstar15, highlighted in the below chart. We believe a well-constructed, systematic, low-cost and diversified approach to capturing defined risk premia has a better chance at delivering on the pursuit of market beta outperformance than a higher cost more concentrated active manager cohort that can be susceptible to style drift over time.
Better still, blending these efficient factor building blocks may achieve improved risk adjusted returns as different factor exposures are expected to out- and underperform during different phases of the market cycle. In our own DAA Managed Accounts we use a blend of 50% A200, for low cost market beta, alongside 50% allocated to QOZ FTSE RAFI Australia 200 ETF, AQLT Australian Quality ETF and MTUM Australian Momentum ETF in a 50/30/20 split. A factor blend which has provided outperformance over the market beta A200 over both short and longer-term periods16.
The below chart shows cumulative excess returns versus the S&P/ASX 200. When a line, such as AQLT’s is moving up it represents outperformance versus the S&P/ASX 200 rather than total returns alone.
