Stars aligned for a strong equity market

AS we are just days away from closing the 2025 investment chapter, it is an opportune time to reflect on the performance of the financial markets and what it has returned to investors this year.

Despite the early setback from US President Donald Trump’s “Liberation Day” tariffs, global markets will close the year on a strong note.

The Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq 100 are higher by between 14% and 22%.

Asian markets, too, are buoyant, with many bourses hitting fresh record highs.

At the close of markets on Christmas Eve, key Asian markets that rose significantly year-to-date (y-t-d) include the Kospi Index, which rose by 71.2%; followed by the Hong Kong’s Hang Seng Index (28.7%); Nikkei 225 (26.2%); Singapore’s Straits Times Index (22.4%); and Jakarta’s Composite Index (20.6%). The FBM KLCI was higher by 2.2% y-t-d.

Aside from the strong equity market performance, investors also made good returns on selected commodities, particularly precious metals.

Gold and silver led the way, posting stellar gains of 70% and 146%, respectively.

However, 2025 was not the year for cryptocurrencies, as both bitcoin and ethereum fell by almost 30% and 40% from their respective all-time highs and down approximately 5% and 12% for this year.

Lofty valuations

Before discussing the local bourse, let us look at the US markets and where they are based on their current level, as well as from a valuation perspective.

Most brokers are relatively bullish on US markets, with the consensus view that the S&P 500 will hit the 7,500 points (pts) level from the current level, or 8.2% higher.

At the top end, analysts have even placed bets that the index will hit 8,000 pts.

Interestingly, the US market is not cheap, trading at a 12-month trailing price-to-earnings (PE) multiple of 25.9 times and a forward PE multiple of 22.8 times.

Both measurements suggest that the S&P 500 is no longer cheap, and it will be an uphill task for the market to perform in 2026.

However, should the US Federal Reserve (Fed) turn more aggressive in cutting rates (for example, more than two times in 2026) plus the Fed’s plan of buying US$40bil worth of short-term US treasury bills (which is a form of quantitative easing), there is a likelihood that the US equity markets can still outperform next year.

On the flip side, should the US economy take a tumble on higher unemployment and persistently high inflationary pressure, the S&P 500 has a strong likelihood that it may correct as earnings may disappoint, or worse, contract.

A mean 22 times PE multiple for the S&P 500 suggests that the US market may correct to about 6,200 points, or down 10.6% from the current level.

Expectations and risk

Markets are all about expectations and risk, and one cannot run away from various scenarios and manage the risk exposure accordingly.

With the market having priced-in two rate cuts, the mild expansion of the Fed’s balance sheet, a sturdy growth of the US economy, and no surprises on the US policy front – all this can change and will as we progress into 2026.

The biggest challenge is predicting US core inflation prints, which have remained sticky and elevated, while the outcome of the US mid-term elections could alter the market’s direction.

All about earnings

It is not unexpected to see brokerage firms placing high earnings growth estimates at the beginning of any given year, and only to realise later that the estimates were simply too optimistic.

Soon after the first-quarter (1Q) or 2Q earnings numbers are out, brokers begin to cut down on their growth estimates.

For 2025, earnings growth slowly disappeared into thin air and dropped to just 2% from the 9% that was projected a year ago.

As brokers have issued their respective outlook for 2026, it does seem we are playing this “earnings growth story” time and again.

Based on the market outlook issued by seven brokers, earnings growth for 2026 is currently forecasted at close to 7% for the year, with the FBM KLCI expected to hit 1,745 pts in 12 months based on a 15 times PE multiple.

Going for large IPOs

The year 2026 promised to be a year of big initial public offerings (IPOs).

First major IPO out of the block will be Sunway Healthcare Holdings Bhd, which may be listed with a potential market capitalisation of approximately RM14bil.

This valuation is based on enterprise value over earnings before interest, tax, depreciation and amortisation of approximately 20 times to 22 times for 2026, after taking into consideration annual growth of more than 20% in both this year and next year.

Other large IPOs on the waiting list include the potential listing of MMC Port on a likely lower valuation matrix, while Loob Bhd, SkyeChip Bhd, Chubb Insurance Malaysia Bhd and Empire Premium Food Bhd are also slated, as the draft prospectus exposures have been filed.

While large market capitalisation IPOs are important for Bursa Malaysia, it is hoped that these newbies will deliver the expected growth to sustain their respective valuation matrix at IPO.

Big on banks

Over the past month or so, the FBM KLCI has been on a strong upward momentum with the key barometer rising almost 74 pts or 4.6% from 1604.47 pts, mainly driven by the banking sector as the Finance Index surged 5.6% in the month of December and up to Christmas Eve.

The re-rating of the banking sector is not unexpected, given the slumber for a while now as it plays catch-up with regional banking sector valuations, where earnings growth has not been that spectacular either.

But the market seems to appreciate the yield story as well as share buy-backs.

With improved expectations in terms of earnings growth in 2026, driven by stable net interest margin and modest loan growth of 5%, the banking sector is seen to be an outperformer next year.

Given the expected cut in the US Fed Fund Rate, the Malaysian banking stocks are also expected to generate interest among foreign institutional investors as a yield and currency play.

With more than 40% weighting, the performance of the Malaysian banking sector in 2026 will pull up the market to at least hit the consensus estimate of 1,745 pts.

A small re-rating to 16 times forward PE multiple could lift the FBM KLCI fair value to beyond 1,850 pts and closer to its all-time high of 1,896 pts, which was last seen more than a decade ago.

Cautious on REITs

While the real estate investment trust (REIT) sector looks decent in terms of yield and growth expectations, and with the retail REITs set to benefit from tourism boom on the back of Visit Malaysia 2026, the absence of news related to the withholding tax on dividends paid out to different class of investors will likely see these investors now subject to marginal tax rates.

Glittering gold

While 2025 has been good for most plantation-based companies as well as those involved in the jewellery-related business, especially retail jewellery chain operators as well as pawnbrokers, 2026 will likely be another strong year, with crude palm oil price expected to remain firm.

This is despite the current high inventory level, driven by demand and weather factors.

As for gold, which recently hit a fresh record high of US$4,500/oz, 2026 will likely be a continuation of 2025 as investors flock to the yellow gold for comfort and safe-haven status, and as the de-dollarisation and debasing of the US dollar in the global markets continue.

Gold may even rise another 50% to 80% from the current level as supply constraints and demand dynamics from non-traditional buyers turn more aggressive.

In fact, 2026 will likely see precious metals taking another giant leap in terms of prices due to investors’ perception of the dollar and its issues.

While silver is a cheaper alternative in terms of price entry, it is the other precious metals that will outshine gold, and in particular, platinum.

Consumer and construction

Consumer plays with high and stable dividends will remain on investors’ radar, as well as be driven by the government’s cash transfer assistance.

As for the construction sector, despite the absence of large infrastructure government-related projects in Budget 2026, the sector is still expected to be a key beneficiary from projects related to renewable energy (RE), data centres, roadworks and highways, Penang light rail transit line, and property development-related projects.

The power and RE sector will remain on investors’ radar due to the continuous rollout of new capacity and capital expenditure by Tenaga Nasional Bhd.

As for the property sector, the Johor-Singapore Special Economic Zone will see committed investments reach key critical roll-out phase, which could push demand for homes in the southern state.

In conclusion, while 2026 will be challenging on the economic front as growth will likely be slower than in 2025, the local bourse is ripe to scale new heights, led by a re-rating of the banking sector, a strong IPO pipeline, a stronger ringgit and a benign inflation outlook, supported by a modest earnings growth outlook.