After reaching a record 9,115 points last month, the ASX 200 dropped as much as 8 per cent to a 5.5-month low of 8,383 last week following a hotter-than-expected US jobs report that reset global rate cut expectations.
Then jumping 1.3 per cent on Monday before fizzling out on new CPI data, ongoing concerns about an artificial intelligence (AI) bubble and uncertainty over interest rates continue to keep equity markets on edge.
But despite the turbulence of recent weeks, UBS said it expects a “respectable” market gain in 2026.
In his outlook for the year ahead, UBS equity strategist Richard Schellbach has forecast the ASX 200 to reach 8,900 points by the end of the year – almost 6 per cent above current levels, though still about 2 per cent shy of its late-October record of 9,094.
“The improved top-line story we are seeing from the local economy should allow many of the domestic earning stocks to see gradual (albeit modest) earnings upgrades over the coming year,
“Commensurate with this earnings recovery story, valuations should remain supported at above average levels given our house view remains that the global AI thematic could have another two years to run,” Schellbach said.
He noted that while earnings optimism usually fades as the year unfolds, the outlook for next year appears to be an exception.
“2026 is looking to buck this trend, with a mining-led upgrade cycle raising the prospect of >10 per cent earnings growth ahead of us,” Schellbach said.
While mining was identified as the key driver, he added that improved earnings from consumer-facing companies were “comforting” and noted that even the much-maligned healthcare sector is “heralding a return to growth” towards the end of next year.
Head of Australian equities at Schroders, Martin Conlon, similarly pointed to the significant impact of change in any of Australia’s dominant sectors: mining, financial services, and construction.
“The fate of these sectors will always have a disproportionate impact on returns for Australian investors,” Conlon said.
UBS also noted that pricing power indicators showed that margins have recently stabilised, pointing to potential expansion in the year ahead.
“Earnings growth would be at risk if profit margins were to slip through 2026, but this appears not to be the case,” Schellbach said.
Following a modest de-rate over recent months, UBS argued that valuations have now been brought back to a “reasonable” level in comparison to the last decade.
On the other hand, Conlon argued that valuations remain aggressive yet uneven.
“Often, the companies commanding the highest prices are not the ones with the strongest fundamentals. Short-term earnings growth and hype around sectors like defence, critical minerals, and AI are drawing far more attention than long-term business sustainability,” Conlon said.
In the current environment, he advised careful and considered choices on the part of investors.
Regarding UBS’s stance on AI, the bank has doubled down on its bullish stance, likening the current period to March 1998 (1.5-2 years before the ‘dot-com’ peak).
“This constructive view rests on the possibility that the future productivity gains from Gen AI could be similar to the 2 per cent boost which was seen through the dot com period,” Schellbach stated.
At the same time, UBS added that even if the AI rally falters, Australia’s market has historically demonstrated resilience and can do so again.
Again reflecting on the ‘dot-com’ bubble, Schellbach noted that after the March 2000 peak, US shares plunged sharply, while Australian equities held up much better – falling just 4 per cent. Currently, only about 6 per cent of the Australian equity markets cap is tech exposed, in comparison to 40 per cent exposure to TMT in 2000.
“The recent decline in Aussie vs US stock price correlations could also protect the local market if US stocks were to correct sharply through 2026,” he added.
Looking more broadly at Australia’s macro backdrop, the bank said it expects economic growth to pick up in 2026 based on resilient household spending, lower interest rates and improving consumer sentiment.
UBS concluded that with the Reserve Bank of Australia likely nearing the end of its rate-cutting cycle, while the US Federal Reserve continues to cut, this divergence should support a stronger Australian dollar.
