The Australian share market is showing signs of being stretched across most valuation measures, trading near 20 times earnings, well above its long-term average. This comes amid global uncertainty fuelled by trade tensions and high valuations in the US market, particularly within the artificial intelligence sector. While some fund managers are concerned about a potential bubble, others believe that technology stocks are justified and see any correction as a buying opportunity.
The ASX’s gross dividend yield is just 3.2 per cent, below the 10-year bond yield, suggesting investors anticipate robust earnings growth and continued policy support. Experts note that elevated valuations are underpinned by global financial support, keeping asset classes near cycle highs. There’s also a growing sense of circularity in AI financing, with the same companies funding and selling to each other, which is being financed by ballooning debt.
Despite these concerns, analysts say it’s not a dot-com rerun. Unlike in 2000, there’s real revenue, profits, and cash flow underpinning these businesses. The key for investors is to be selective. Some analysts find the rest of the world outside the US more attractive with the same exciting thematics but at more reasonable valuations. Opportunities exist in insurers, select industrials, and parts of the consumer space, particularly travel. Companies in gold, uranium, and copper may also be attractive.
While the ASX200 appears stretched on headline metrics, the opportunity set beneath it is broadening. The S&P/ASX Small Ordinaries Index has outperformed the ASX100, indicating that more companies are contributing to growth. Volatility has picked up at an individual stock level, which creates dispersion and opportunities for active investors. Pockets of opportunity persist in sectors like healthcare and packaging. The ASX remains less exposed to the AI enthusiasm driving US markets, with most businesses still trading on fundamentals.
