Why the sharemarket can rise while Australians struggle to pay their bills

High fuel prices, persistent inflation and stretched household budgets appear at odds with a resilient sharemarket. The explanation lies in what share prices actually measure.

For Australians watching the cost of filling the car, buying groceries and servicing a mortgage, the sharemarket can seem to inhabit another country.

Households scrutinise their spending. Businesses face rising costs. Pay increases offer limited comfort when essential bills absorb the extra income.

Yet the Australian sharemarket continues to demonstrate resilience.

How can investors remain willing to pay substantial prices for shares when everyday economic life feels so difficult?

The apparent contradiction becomes easier to understand once we recognise that household prosperity and sharemarket performance measure different things.

A share index reflects the value investors place on listed companies. It does not measure how comfortably Australians are living.

The pressure on households is real

The latest available Australian Bureau of Statistics consumer price figures show annual inflation reached 4 per cent in August. Automotive fuel prices rose 14.8 per cent in that month, reflecting higher world oil prices and the withdrawal of remaining federal fuel excise relief.

That creates pressure beyond the service station. Fuel is an expense for freight operators, tradespeople, farmers and businesses delivering goods or travelling to customers.

Those costs must be absorbed, passed on or offset elsewhere.

It would be inaccurate to say wages have stopped growing. The ABS recorded a 0.8 per cent increase in its Wage Price Index in the June quarter. But a pay rise and an improvement in living standards are different things. The outcome for a household depends on its bills, tax, working hours and borrowing commitments.

Meanwhile, the ASX 200 finished October 20 at 8,816.9 points, down 0.33 per cent for the day. Its resilience does not mean uninterrupted gains, and a high index level should not automatically be described as a record.

The ASX is a particular collection of businesses

The S&P/ASX 200 measures 200 large, eligible ASX-listed stocks, with their influence determined by their market value adjusted for shares available to investors. Larger companies therefore have more influence than smaller ones.

It is not a survey of every Australian enterprise.

The independent restaurant, suburban builder, local retailer and family transport business may face conditions very different from those confronting a major listed company.

Large businesses can have advantages in purchasing, financing, distribution and technology. Some earn substantial revenue overseas. Others sell essential services that customers continue buying even when household budgets tighten.

Consequently, a strong index can coexist with considerable hardship among smaller businesses and their customers.

Even within the index, gains among influential companies can offset weakness elsewhere.

Expensive fuel creates winners as well as losers

Higher energy prices are a burden for consumers and businesses that use fuel.

For an energy producer, however, higher selling prices can improve revenue and potentially profits, depending on production costs, sales contracts, hedging and output.

The same economic event can therefore hurt a household while supporting the earnings outlook of a listed company.

That does not mean an oil shock is good for the sharemarket overall. Expensive energy can weaken demand, increase operating costs and prolong inflation.

It means the effects are uneven.

A market containing resource producers can respond differently from a household whose main exposure to oil is paying for petrol.

Companies can protect earnings while customers cut back

Inflation does not automatically increase corporate profits. Businesses face higher wages, rent, insurance, transport and financing costs too.

However, companies with sufficient pricing power may recover some of those costs through higher selling prices.

Consider a simplified example. A business sells fewer items, but raises prices enough to maintain revenue. If it also controls expenses, its profit may hold up better than customers expect.

The customer experiences a more expensive purchase. The shareholder may see reasonably resilient earnings.

There are limits. Customers can switch suppliers, choose cheaper products or stop buying. Competition can prevent price increases from sticking.

But household discomfort does not necessarily translate immediately into falling profits across the largest listed businesses.

Share prices look ahead

A household must pay this week’s bills. Investors are trying to assess earnings over years.

Share prices reflect expectations about future profits, dividends and interest rates, alongside the risks investors attach to those expectations.

A difficult period can therefore coexist with rising shares if investors believe conditions will eventually improve—or simply prove less damaging than previously feared.

This explains an otherwise puzzling market reaction: disappointing economic news can sometimes accompany a rally.

If investors had expected something worse, the news may improve their assessment. If weaker activity increases expectations of future interest rate relief, that can also support valuations.

These are possible explanations for market behaviour, rather than proof of what drove any particular trading session.

Expectations can also be wrong. A resilient market is a judgement about the future, not a guarantee.

Higher interest rates still matter

There is no economic rule allowing shares to ignore persistent inflation indefinitely.

Higher interest rates increase financing costs, place pressure on customers and make deposits and bonds more competitive alternatives to shares. They can also reduce what investors are willing to pay today for earnings expected years from now.

Banks face competing effects. Lending and deposit pricing can support income in some circumstances, while funding competition, slower credit growth and borrower difficulties can work against it.

A sustained squeeze on households can eventually affect retailers, lenders, landlords, suppliers and employers.

The important question is how much damage investors already expect—and whether actual results turn out better or worse.

A higher index does not mean everyone is wealthier

Sharemarket figures are generally quoted in dollars and index points without adjustment for inflation.

An increase in an investment’s dollar value does not necessarily deliver an equivalent increase in purchasing power. Dividends also matter when assessing overall returns; the headline price index alone does not tell the full story.

There is a further distinction between owning assets and having money available to spend.

Many working Australians have exposure to shares through superannuation. Strong investment performance can help their retirement savings while doing little to relieve their immediate fuel, grocery or mortgage bills.

The same person can benefit as a long-term investor and struggle as a current consumer.

What would test the market’s confidence?

Persistent fuel costs, weaker customer demand, rising loan losses and disappointing company profits could challenge valuations.

So could interest rates remaining higher than investors anticipate.

Conversely, easing energy costs, improving productivity and earnings that withstand the slowdown could help explain continued resilience.

The index alone cannot establish which outcome lies ahead. Understanding its movement requires looking at the businesses driving it, their earnings and the expectations embedded in their prices.

The Times View

There is no need to dismiss household hardship because the sharemarket holds up. Equally, market resilience does not by itself establish that investors have lost touch with reality.

Both can reflect the same economy: one in which the costs and benefits fall unevenly, large businesses have different exposures from their customers, and investors anticipate conditions that households have yet to experience.

A strong sharemarket can support investment and retirement savings. It deserves attention.

But it cannot substitute for affordable essentials, sustainable businesses and wages that deliver a reasonable standard of living.

The sharemarket tells us what investors believe companies may earn. It does not tell us whether Australians can afford to live.

This article provides general economic information and commentary, not financial advice.