The last few weeks have seen both volatility and gains for the ASX share market. Just look at the chart below of the S&P/ASX 200 Index (ASX: XJO), which shows a rise of 2.11% since the start of 2025, despite recent pain.
Several leading ASX shares have demonstrated impressive performances since the beginning of 2024. Notable examples include the Commonwealth Bank of Australia (ASX: CBA) and Pro Medicus Ltd (ASX: PME), both of which have reached significantly high price-earnings (P/E) ratios.
Julia Lee, head of client coverage at FTSE Russell, recently commented on the valuations and the upcoming reporting season, according to the ABC:
One of the key questions for investors will be, is there going to be earnings growth for the Australian share market?
If we look at what happened in 2024, we actually saw earnings going backwards by about 4 per cent, and yet the Australian share market grew by 7.5 per cent.
That's not a sustainable trend when you're paying high multiples and high valuations.
This reporting season it will be all about whether we see upgrades to the outlook to help support those lofty valuations that we're seeing here on the Australian market.
So, where should investors look?
Which sectors are cheap?
The ABC reported on comments from Jun Bei Liu, a fund manager from Ten Cap, about where there may be opportunities.
One of the areas where the expert is seeing opportunity is with companies in the ASX retail share space, particularly ones that that have delivered profit warnings. Jun Bei Liu said:
We think the consumer-facing companies will have good revenue numbers. I think that sector represents quite a lot of buying opportunity. Investors will pile back into businesses that have given 'profit warnings', like Myer Holdings Ltd (ASX: MYR) and Premier Investments Ltd (ASX: PMV).
The Ten Cap fund manager is also optimistic about the ASX real estate share sector because of the valuation and potential for interest rate cuts to provide a boost:
Interest rate cuts are always great for those businesses because they're heavily geared. Also, the valuation of that sector is actually quite low. We think office property stocks like Dexus (ASX: DXS) might do a bit better simply because there's not much expectations for them and because an interest rate cut is on the cards.
ABC reported on Bloomberg stats that showed real estate has a P/E ratio of 19.8x, consumer staples have a P/E ratio of 21x, consumer discretionary has a P/E ratio of around 29x, and technology has a whopping earnings multiple of approximately 147x. The sector with the lowest P/E ratio was energy, with a multiple of 11x, though that doesn't mean it's necessarily the best option.
Which ASX shares are expensive?
As I just highlighted, technology is trading on a significantly higher valuation than other sectors.
Julia Lee warned of the dangers of these high-flying stocks missing the high expectations of their financial growth:
There's a handful of companies in Australia where the price-to-earnings ratio is just extraordinarily high.
You'd want to look very closely at the tech sector, in particular, where you've got companies like WiseTech Global Ltd (ASX: WTC) and Xero Ltd (ASX: XRO) on P/Es of more than 115 times. So those are very, very rich valuations.
They've grown very quickly and they continue to surprise to the upside generally.
But when you've got companies that are priced so well, and you're expecting that kind of dramatic growth quite a long way into the future, if there's any surprise — even if it's only marginally negative — or they don't live up to expectations, you can see a real, quite dramatic price response to that can be really disappointing.
However, Jun Bei Liu noted that lower interest rates could soften some of the dangers of a high ASX share valuation:
If we have an interest rate cut, their expensive valuations won't be a big problem as long as they can deliver on earnings expectations.
