What's the point of record highs if no one feels rich?

The Australian stock market has almost made it to the end of another reporting season and it's fair to say things could have gone worse.

August reporting season so far has seen 36.1% of companies post misses and only 31.2% post beats, at a beat/miss ratio of 0.86. Brokers handed out a meagre 34 upgrades and 82 downgrades.

By comparison, February reporting season saw 33.9% of companies post beats, and 31.8% post misses, at a beat/miss ratio of 1.07. Back then, brokers handed out 96 rating upgrades and 45 downgrades.

The market fared worse this time around, even after accounting for relative expectations and the broader backdrops against which those reporting seasons unfolded. 

Despite that, the ASX 200 remains within touching distance of the record high it posted in early August. Given the context, you'd expect investors to be in an ebullient mood. There are a few clear reasons they aren't. 

Getting real on returns

The ASX 200 may be holding steady above 9,000 points, but that doesn't capture how it's actually performed recently. 

The S&P/ASX 200 Net Total Return (XNT), which tracks the index's overall return including dividends, is up 4.37% over the last 12 months. Over the same period, CPI inflation has been 3.5%. 

That leaves a real return of 0.87%. No wonder investors aren't out in the streets celebrating. 

Extending that out to the last few years also makes for disappointing reading. Since the middle of 2021, the ASX 200 has averaged a total real return of approximately 19.4%, which works out at an annualised return of 3.88%. 

Since 2000, the ASX 200 has managed a real return of 5.3% p.a. Since 1980, it's managed 6.8% p.a. The simple facts are that the ASX has delivered historically weak real returns since Covid, and that has only gotten worse over the last 12 months. 

What has compounded that sense of underperformance is how well the rest of the world is doing. The S&P 500 is up 21% over the last 12 months. Emerging markets are up almost double that. 

For all intents and purposes, the ASX 200 has effectively done nothing for a year, at a time when investing in equities feels more fraught than usual. There's a pervasive sense that things could go wrong at any moment, with more than a handful of potential headwinds that could single-handedly derail the decade-plus-long bull run developed-market equities have enjoyed. 

The AI supercycle is propelling the US and Asia to glorious new highs, but feels like a house of cards that could send the market tumbling at any moment. There are also ongoing oil price pressures, prolonged conflicts, and a fast-developing government debt crisis.

Locally, you can also factor in general inflation and potential rate hikes, weak relative earnings growth on the ASX, and a property market slump that could hit the companies driving much of the earnings growth we are seeing (the banks). It's not pleasant reading.

The perceived risk/return profile on Australian stocks right now is so off-kilter it makes you wonder why you're even bothering. 

It's all limited upside, big downside. At least global investors got to enjoy themselves in the meantime.