FY26 outlook: Great Rotation from banks to resources begins

Earnings season

In this week's edition of IG Macro Intelligence, we take a look at how risk assets are tipped to perform in FY26 and what stocks to consider.

Crystal ball gazing

After a solid FY25 financial year, where Australia 200 delivered an almost 10% return, analysts are divided as to whether FY26 will be as fruitful.

The first week of the new financial year saw records breached in US markets and at home. Yet headwinds such as US President Trump’s tariffs, ongoing geopolitical uncertainty and sluggish growth, especially in China, could temper the outlook. On the upside, anticipated interest rate cuts, rising consumer confidence, more robust-than-expected Chinese stimulus and corporate actions like mergers, acquisitions and share buybacks may bolster investor demand.

Market performance chart

Jason Todd of Ten Cap believes that avoiding a “trade-driven recession” is key to sustaining positive conditions. He notes that if interest rates settle and earnings hold up, “those are pretty positive conditions” for equity markets even amid global uncertainty.

AMP's chief economist, Shane Oliver, offers a more cautious perspective: "We've had three years of 9%-plus balanced-fund returns. History tells us you're going to hit a rougher patch sooner or later, so returns will probably slow over the next 12 months—and volatility will pick up."

The great rotation

BHP Group (ASX:BHP)

After banks outperformed last year—Commonwealth Bank of Australia up 45% while BHP fell 14%—early FY26 flows suggest a shift back into resources. Profit-takers on CBA shares helped fund a 5% intraday gain in BHP, supported by improving Chinese infrastructure data.

John Lockton of Sandstone Insights argues that this marks "the turning point between the stellar run of CBA and the underperform" of BHP. He points to three years of underperformance in BHP, saying that catalysts such as better Chinese housing and infrastructure data could help close that gap. Refinitiv data show the average broker recommendation on BHP is a buy, with a target price of 41.78 implying roughly 8% upside.

BHP historical trends and price targets

Similarly, ASX Tradewatch technical data show shares appear to be in a strong near-term rally, albeit within a longer-term bearish trend as the 200-day moving average is sloping downwards.

BHP daily chart

UBS retains a neutral stance on BHP, targeting $40 and warning that trade-war headwinds and China’s Liberation Day uncertainty could weigh on metals prices despite modest stimulus.

By contrast, Citi, Macquarie, Morgan Stanley and MPC Markets are more upbeat with Refinitiv data showing a consensus buy rating with an average target of $41.78, implying roughly 8% upside. MPC’s Mark Gardner adds that record-high copper prices and an upcoming potash project, which will diversify BHP’s iron-ore exposure and make it one of the more compelling long-term plays.

BHP buy/sell indicators and analyst projections

Commonwealth Bank of Australia (ASX:CBA)

While many investors pivot to resources, Morgans’ Christian Saffioti still backs CBA. He admits it’s a contrarian move—“sometimes markets aren’t rational”—but argues CBA’s strong profit growth, attractive dividends and solid capital buffers make it a hold rather than a sell.

Top picks of 2026

• Retail: Morningstar favours Kogan, with a target implying 35% upside; Wesfarmers and JB Hi-Fi also stand out

• Lithium: Stuart Roberts of Stocks Down Under highlights Mineral Resources and Pilbara Minerals ahead of a cyclical upturn

• Defence: Dean Fergie of Cyan Investment flags AML3D after its US Navy collaboration

Retail sector outlook chart

Kogan (ASX:KGN)

Kogan shares have fallen around 8% over the past 12 months, trading in a clear long-term downtrend beneath a tumbling 200-day moving average and bearish momentum signals that point to limited upside. 

Kogan daily chart

Yet Refinitiv data show a consensus hold rating with a $5.24 target price, implying roughly 35% potential gain from current levels.

Kogan historical trends and price targets

Mineral Resources (MIN) and Pilbara Minerals (PLS)

By contrast, lithium-focused names such as Mineral Resources and Pilbara Minerals, once the "dog stocks" of FY25, could be set for a revival. As Stuart Roberts of Stocks Down Under observes, lithium's cyclical nature and voracious demand from electric-vehicle battery makers suggest we may be on the cusp of another boom in the commodity's price cycle.

Analysts at Morgan Stanley, Morgans and Macquarie are among others positive on the outlook for Mineral Resources, which shed around 60% in the last financial year.

Mineral Resources buy/sell indicators and analyst projections

Defence sector outlook

Amid rising geopolitical tensions, defence stocks such as DroneShield and AML3D are drawing renewed interest. AML3D commands a buy consensus with an average price target of $0.35, implying around 37% upside. Cyan Investment’s Dean Fergie points to the company’s US Navy collaboration as a game-changer, noting that securing orders from “the largest naval fleet in the world” can significantly boost a small manufacturer’s earnings.

AML3D historical trends and price targets

Cautious outlook

Despite these pockets of opportunity, some strategists are taking a more conservative stance. Ord Minnett’s David Lane recommends locking in gains and holding cash amid lofty valuations and unresolved tariff risks. With global uncertainty high and Australia yet to finalise US tariff negotiations, he warns of “fairly volatile” conditions over the next six months.