What’s happening beneath the surface of Australian equities?

Our forecast for Australian equities at the index level is positive in 2026, predicated on earnings expectations being met whilst valuations remain unchanged. However, we expect performance to be differentiated, with a strengthening commodities cycle, mid and small-cap outperformance, and a focus on earnings growth creating areas of relative outperformance.

Changing of the guard to drive Australian large caps forward

Strong momentum in resource prices underpin our positive outlook. Iron ore has rallied and is holding above US$100 per tonne. While we expect limited further upside, current levels support strong profitability for Australia’s large cap miners.

Further, the strategic pivot of Australia’s large cap miners toward copper should not be underestimated. BHP is now the world’s largest copper producer, with the metal contributing 45% of its earnings, up from 29% a year ago¹. Rio Tinto’s copper assets currently only contribute ~15% of group earnings², but production will grow significantly through to 2030 and may be boosted further by a possible acquisition of Glencore. Copper prices are at all-time highs, with supply constrained by multi-year project lead times, while demand is driven by the AI infrastructure buildout and energy transition.

For these reasons, we believe materials will drive large-cap returns in 2026, a notable shift from recent history. Over the last two years, financials accounted for 60% of the ASX 200’s gains led by the ‘Big 5’³. While financials earnings expectations remain solid at 6.9% (which we expect can be met), we see meaningfully greater upside in materials given their earnings inflection from -18.0% in FY25 to 19.4% in FY26⁴.

Source: Refinitiv. As at 13 January 2026. FY’26 and FY’27 include analyst forecasts. Actual results may differ materially from forecasts.

Commodities surge having bigger impact for smaller caps

We expect the rally in gold and critical minerals to be a key driver of Australian mid and small-cap outperformance in 2026.

Australia’s gold exports are expected to grow by ~47% in FY25/26, surpassing coal and natural gas to become our second-largest export behind iron ore⁵. Meanwhile, the October 2025 US-Australia Critical Minerals Framework, an US$8.5 billion partnership focused on rare earths and critical minerals including lithium and graphite, positions Australia as a strategic partner in countering China’s dominance in processing capacity. With escalating US-China trade tensions, we expect critical minerals to remain a focal point of geopolitical competition and national stockpiling.

Mid and small-cap indices exhibit higher materials exposure in Australia, with a higher portion of earning derived from gold and critical minerals, than large caps, positioning them to benefit disproportionately from the commodity rally.

Source: Refinitiv. As at 13 January 2026. Actual results may differ materially from forecasts.

The outlook for Australian quality and tech

More broadly, we expect 2026 to favour companies demonstrating strong earnings momentum. With the ASX 200 trading at a forward P/E of 20.9x, significantly above the 20-year average of 15.9x⁶, there is limited scope for further multiple expansion. This environment could favour companies with strong earnings growth, whether in materials benefiting from the commodity cycle or other high-quality companies across the market.

Finally, in the face of the 22% decline through late 2025 we remain constructive on the long-term growth prospects of Australia’s technology sector. In Q4, RBA policy expectations became restrictive, hurting high multiple growth stocks, while stock specific M&A activity⁷ compressed near-term earnings of the sector. However, we expect valuation concerns to subside, with lower long-term bond yields by year end, and strengthening earnings momentum, with consensus FY27 and FY28 earnings expected to growth by greater than 30%. The sector now trades at a more attractive entry point for investors with upside catalysts.

Investment implications

Following rate cuts last year smaller size companies in the Australian market had already begun outperforming. Furthermore, small cap exposures with higher allocations to profitable materials companies could benefit the most from high commodity prices, namely gold and relevant critical minerals producers, given their operating leverage to those prices. Finally, on a forward price to earnings basis small cap indices are trading at a discount to the broader market, offering compelling upside.

• Betashares Australian Small Companies Select ETF (ASX: SMLL)
  • SMLL provides access to a tailored portfolio of high-quality, profitable small-cap Australian companies. SMLL currently holds a higher proportion of profitable small cap miners compared to the benchmark Small Ords Index⁸.
  • SMLL’s approach has led to it outperforming the S&P/ASX Small Ords Index by 11.1% in 2025 and by 1.6% p.a. over the past 5-years⁹.

Beyond materials we remain constructive on a quality approach to investing across all cap spectrums in the Australian market. Given the market’s cyclical nature, seeking out companies within each sector that display high, sustainable earnings for a long-term allocation can help drive returns through business cycles.

• Betashares Australian Quality Leaders ETF (ASX: AQLT)
  • AQLT’s index selects 40 Australian companies comprising Australia’s large caps, re-weighted by their quality metrics rather than market capitalisation, and the highest quality mid- and small caps on the ASX¹⁰.
  • AQLT’s approach has led it to outperform the S&P/ASX 200 by, on average, 3.9% p.a. since inception on 4 April 2022¹¹.

We have maintained a constructive view on the Australian technology sector since the 2022 valuation-led drawdowns. In Q4 2025 the sector experienced another pullback, driven by the RBA’s hawkish tone (which we don’t expect to translate to a material hiking cycle) and Xero and WiseTech’s¹² acquisition integration costs hurting overall sector earnings growth in the short term (2-year forward earnings are expected to rebound strongly). For long-term allocators, this could represent another compelling entry point.

• Betashares S&P/ASX Australian Technology ETF (ASX: ATEC)
  • ATEC provides exposure to leading ASX-listed companies in a range of tech-related market segments such as information technology, consumer electronics, online retail and medical technology.
  • While experiencing volatile returns and in the midst of a 22.4% decline ATEC has still returned, on average, 12.15% p.a. since inception.¹³