Oz Equities: From Tech Darlings To Value Pivot

Array
(
    [0] => Array
        (
            [0] => ((DRO))
            [1] => ((ANZ))
            [2] => ((WBC))
            [3] => ((NAB))
            [4] => ((CBA))
            [5] => ((CSL))
        )

    [1] => Array
        (
            [0] => DRO
            [1] => ANZ
            [2] => WBC
            [3] => NAB
            [4] => CBA
            [5] => CSL
        )

)

This story features DRONESHIELD LIMITED, and other companies.
For more info SHARE ANALYSIS: DRO
The company is included in ASX200, ASX300 and ALL-ORDS

2025 saw a sharp reversal in momentum for ASX-listed equities. Are there any lessons for 2026?

• Cyclicals and resources made a strong come-back in 2025
• Prior winners turned into losers while investor focus shifted
• Clear divergence between US markets and the ASX
• Portfolio rotation is backed up by revisions in earnings forecasts

By Paul Githaiga

From Tech Darling to Value Pivot: Why Australian Equities Are Entering a Post-AI Rotation and Where to Position Your Portfolio in 2026

The most telling change in markets right now has little to do with headlines or share prices.

It is showing up instead in earnings revisions.

After several years where capital poured into a narrow group of growth and AI-linked stocks, investors are becoming less willing to pay up for promises that sit well ahead of delivered profits.

What is emerging is not a rejection of technology, but a growing insistence that growth be supported by cash flow.

Offshore Comparison (Australia vs US)

There is a clear divergence opening up between Australia and offshore markets. In the US, equity leadership remains tightly clustered around a handful of mega-cap names still benefiting from margin expansion and heavy AI-related capital spending.

The Australian market, by contrast, is already behaving as though it is in a more mature phase of the cycle.

Dividend yield, balance-sheet strength, and earnings reliability are once again driving relative performance. This pattern is more commonly associated with periods when growth expectations are stabilising rather than accelerating.

A Maturing Market and the Limits of Narrative Investing

Over the past few years, investors have been obsessed with AI and tech stocks. AI grabbed the spotlight as the next big driver of profits and business disruption, capturing everyone’s attention.

J.P. Morgan pointed out that the rally has been all about a handful of companies. Since late 2022, around two-thirds of the S&P 500’s growth and spending have come from just 42 AI-linked companies. So, most of the market’s gains were thanks to a pretty small group.

By late 2025 and into 2026, it is clear the ASX has moved past the hype. The focus is now on earnings and value. Many companies are reporting lower profits, and investors are favouring those with steady earnings and strong cash flow.?

ASX Earnings Outlook — ERBI (Earnings Revision Breadth Index)

• ERBI tracks the balance of earnings upgrades and downgrades across the ASX 200.
• Recent ASX trading shows miners and cyclicals holding up while technology and financials lag, highlighting a shift in market leadership. At the same time, Australia’s services sector continues to expand, albeit more slowly, with the December PMI easing to 51.1; a reminder that rotation is playing out against a backdrop of steady but moderating economic growth.

In short, with just a few companies driving the market, expensive growth stocks are under pressure. Investors are seeking out shares that offer reliable dividends and consistent cash flow.

Sub-sector winners & losers (2025 – early-2026)

Winners

• Materials and resources were the big winners in 2025, posting returns of around +36%. High prices for gold, lithium, and other metals did the trick, and demand was solid across the board.
• Some industrial and contracting companies performed strongly. Infrastructure projects and defence contracts boosted performance. DroneShield ((DRO)) is a clear example: the stock jumped roughly 300% across 2025 after the company won large European defence contracts and saw surging global demand for counter-drone/security systems.
• The big banks bounced back late in 2025, thanks to stronger profits and a steady outlook for loan growth. They made gains, but not as much as the miners or industrials, and results varied between banks.

1. ANZ Group ((ANZ)): circa 33% return year-on-year. ANZ was the top performer among the big four.
2. Westpac ((WBC)): circa 24% return year-on-year, ahead of NAB and CBA.
3. National Australia Bank ((NAB)): circa 15% return year-on-year.
4. Commonwealth Bank of Australia ((CBA)): circa 6% return year-on-year — the laggard among the majors.

The late-year recovery in bank share prices is best understood as a preference for certainty rather than a renewed appetite for growth.

In a market where earnings visibility has narrowed, investors have shown a willingness to accept modest upside in exchange for dependable margins, capital strength and income. It is a defensive rotation in behaviour, even if the sector itself is not traditionally labelled as such.

Losers

• Information Technology: ASX technology stocks were hit hard in 2025, with the sector down roughly –25% from its highs. With fewer upgrades and the shine coming off big promises, investors pulled back and prices tumbled.
• Healthcare: Healthcare stocks had a rough year in 2025. Big names like CSL ((CSL)) took a hit, with share prices dropping sharply after the company cut its profit growth forecasts and went through restructuring. The wider healthcare sector also lagged
• Consumer Discretionary & Energy: In 2025, retailers and energy stocks in Australia just could not keep up. Retailers barely made any gains, and energy prices slipped a little, though dividends helped lift the total return. Meanwhile, materials and industrials ran ahead.

Macro Backdrop

With inflation easing (CPI at 3.4%), policy on hold, and external demand uneven, the macro backdrop remains supportive but less forgiving than in prior years.

That places a higher premium on earnings quality and balance-sheet strength.

Historical Parallel: 1920s versus 2020s Rotation

History has a habit of repeating familiar patterns. When hype sends share prices soaring, reality usually sneaks in and reminds everyone that fundamentals still matter.

The 1920s Tech Analogue

• In the late 1920s, excitement about new tech and pure speculation pushed prices well ahead of actual earnings. When profits didn’t keep up, investors pulled back and the market had to reset.
• Before it all went pear-shaped, only a few stocks were making gains, and everyone piled in on the same handful of names.

Today’s Contrast:

• These days, rules and watchdogs help keep the market steady, but the same old pattern —just a few big names leading and prices getting stretched— still pops up.
• A negative ERBI now is a bit like what happened back then—not a sign everything is about to crash, but that the market is just shifting gears.
• Just as in the 1920s, in 2025, only a few stocks did the heavy lifting, while the rest struggled to keep up.

One lesson from that earlier period is particularly relevant today: markets ultimately rewarded not the companies that pioneered new technologies, but those that found practical, repeatable ways to turn innovation into sustainable profits.

The same distinction is likely to matter as the current AI cycle moves beyond its early, capital-intensive phase.

The Core Takeaway: Story to Substance

Markets are shifting from flashy stories to steady earnings. High-multiple tech names are no longer afforded the same margin for error.

Investors now favour cash flow, dividends, and sensible prices. This is not a meltdown. Think recalibration, not collapse. ERBI shows earnings revisions narrowing — breadth matters again.

Portfolio move: favour companies with reliable cash and proven returns on capital. Keep selective tech exposure where margins are widening.

Simple message: trade the story for substance.

Portfolio Positioning Framework for 2026

Strategic Themes

1. Valuation discipline: Focus on companies with reasonable prices and strong returns on capital.
2. Earnings breadth: Keep an eye on the ERBI and use it to tweak your risk, not bet the farm.

3. Income & cash flow: Prioritise sectors that offer consistent dividends and reliable cash flow. They can help stabilise your portfolio.

Investor Takeaway

None of this suggests innovation has lost its place in portfolios. What it does suggest is that markets are becoming less forgiving.

As earnings revisions narrow and leadership broadens, Australian equities appear to be moving away from story-driven valuation support and back toward fundamentals that can be measured and sustained over time.

Technical limitations

If you are reading this story through a third party distribution channel and you cannot see the table included, we apologise, but technical limitations are to blame.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms