Market rotation punishes growth funds as small caps rebound

Binaya Dahal

Journalist

13 February 2026

Australian equity markets underwent a sharp rotation in 2025, punishing growth-focused strategies while delivering outsized gains to resources and small-cap stocks, according to new analysis from investment research house Lonsec.

The review of the calendar-year performance showed technology and healthcare stocks fell 19.1% and 23.9%respectively, in contrast with resources and materials stocks that surged by 36.2% and 37.5%.

Director of Research at Lonsec, Peter Green said the findings showed a clear shift in market leadership this year.

“That rotation significantly impacted growth managers’ relative performance,” Green said.

After several subdued years, the small-cap sector staged a strong recovery with the S&P/ASX Small Ordinaries Index rising almost 25%. Gold miners were among the strongest beneficiaries, supported by a 65% rise in the spot gold price.

“Small caps finally had their day in the sun,” Green said.

Lonsec also reported heightened volatility around the February and August reporting seasons with share prices moving sharply when firm’s earnings diverged from predictions.

“We observed large price reactions when company results differed from expectations,” Green said.

“Managers have been more active leading into reporting season as earnings guidance becomes an increasingly important driver of performance.”

Furthermore, the findings estimates that large industry superannuation funds now account for roughly 12% of capital in Australian equities, assuming a quarter of member balances are allocated locally.

At the same time, passive investment flows continued to influence index composition and liquidity, while initial public offering activity remained subdued through the year.

The research house expects listing activity to recover in 2026 as conditions stabilise.

“These structural forces are reshaping the Australian equity landscape,” Green said. “They create both challenges and opportunities for active managers.