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Quick Bites | Aussie share market valuations

February 27th, 2025 | Quick Bites
By: Paul Zwi

Quick Bite: Aussie share market valuations

Author: Paul Zwi

Australian share market forward Price Earnings (P/E) ratios are generally pricey. The overall market at 18.2x future earnings masks some of the obvious outliers:

  • Overseas Growth stocks are trading on a demanding 45.5x multiple
  • Financials are at 20.2x and Industrials at 22.5x.

On the other hand, Resources at 13.7x look reasonably cheap. Of course, much depends on how their earnings perform over the next year.

Source: SHAW

Having retreated from near record highs, the Australian share market is still more expensive than it has been over the long-term average. Using analyst Martin Crabb’s model (sourced from SHAW & Partners) as shown below, the S&P ASX 100 Index (the orange line) is flirting with “fair value” (the black line), but well above the level at which investors could expect a 15% Total Shareholder Return (the grey line on the chart).

Source: SHAW

The next chart shows the market as a multiple of its 12-month forward earnings. When the P/E ratio is low, the market is relatively cheap, and when the P/E ratio is high, then it is relatively expensive. On average, the Australian share market tends to trade on forward earnings multiples of about 14.5x, occasionally falling as low as 12x (during the worst of the GFC and at the start of the pandemic) and as high as 19.5x as we bounced back following the pandemic lockdown. At present, the market is trading around 18.2x forward earnings.

Source: SHAW

The high P/E ratio would be less concerning if we anticipated that earnings were about to take off and experience strong growth over the next few years, but unfortunately, this does not appear likely. Indeed, the trajectory for profits expected in the market over the next 12 months is down – with reporting season bringing more disappointments than upgrades, especially for iron ore stocks and the banks.

Source: SHAW

Industrials ex banks have the “best” earnings as they tend to be more resilient and grow faster than other sectors.

Source: SHAW

As we have noted on many occasions, valuations are a useful tool for prudent investors over the medium- and long-term but are less meaningful in forecasting market movements over the short-term.