The Australian market is set to trade higher for the rest of the year - potentially a further five to 10 per cent - according to Australian equities boutique fund manager, Ten Cap. This means investors should be overweight equities unless they observe risks increasing.

Ten Cap co-founder and chief executive officer, Jason Todd, says that the firm has been more optimistic than the consensus on the ability of equities to absorb and/or look through downside risks for most of 2025.

“We took the view that when US President Trump paused the implementation of tariffs on April 9, that was the peak in uncertainty. Since then, we’ve ridden the wave higher without the accompanying fear of doing something wrong.

“We have an optimistic outlook on the macro backdrop and from an equity perspective, whether it is international or domestically, we think the market will be meaningfully higher by year end. If you're not long, you need to get long, and we think you just stay long until (and if) we see these risks amplify,” he said.

The current set of risks - ongoing tariff negotiations, elevated geopolitical events like the conflict in the Middle East, volatile commodity prices, and widespread distrust in the equity rally - are not enough to change this view, as Todd says positive drivers are also gaining momentum.

"We expect equities to continue climbing a wall of worry through the second half of 2025. Maybe not in a straight line but certainly with an upward bias. Equity markets are showing a high degree of resiliency through their repeated ability to absorb downside risks, and we think this is a solid base for further gains as we move into the second half of the year," he said.

Ten Cap lead portfolio manager and co-founder Jun Bei Lui says the Australian market has the potential to finish the year with mid "teen" returns, driven by a combination of earnings upside and earnings multiple expansion, particularly in the commodity and cyclical related areas.

"I think investors will be surprised by how resilient the Australian market is to ongoing risks and volatility. We expect mid and small cap companies to have an even better year than some of their large cap counterparts," she says.

Domestic cyclicals are also an area that should do well with early signs of the housing recovery becoming more pronounced, and consumer sentiment improving.

“Domestically, we are very confident that policy rates are coming down. For cyclical areas, whether it be consumer or interest rate sensitive areas, that's generally a very positive driver.

"Our portfolio remains overweight key beneficiaries of this, with investments in JB Hi-Fi, REA Group, Seek, and Universal Store, where we see a clear path to earnings upgrades as confidence improves.

“For example, JB Hi-Fi has been that compounder that continues to deliver, despite the patchy retail environment for the last four months. We believe the company will continue to drive growth over the next 12 months, with the expected rate cut from the RBA an added tailwind for the company. Analysts often miscalculate forecasts on operating leverage, whether on the upside or downside, so when earnings are upgraded and revenue numbers starts to improve, the consensus still underestimates how much earnings upgrade will come through.

“We think the earnings environment will begin to bottom out this August reporting season and we'll start to see some positive leverage. Valuations are not going to be a constraint for upside,” says Liu.

As part of its strategy to back high-quality businesses early, Ten Cap has also been a participant in several IPOs this year, including that of Virgin's (ASX: VGN) relisting following its restructuring by Bain Capital.

"Virgin emerges from restructuring with a leaner cost base, improved margins, and a clear strategic runway. It is also good for Qantas to have some listed competition," Lui says.

Ten Cap was a participant in the IPOs of gold and copper miner Greatland Resources (ASX: GGP) and retirement living platform GemLife Communities Group (ASX: GLF).

"GemLife has a proven operating model and clear demographic tailwinds. We see significant potential for scale and margin expansion over time," Lui says.

While recent IPOs have traded a little mixed, Liu says strong demand is a clear indication of the underlying bid for new stocks and the extent of liquidity available for opportunistic investments.

As uncertainty in the US persists, Ten Cap believes Australia will establish itself as a safe haven for investors.

"The US is kicking own goals and outside of a recession, we think Australia can avoid the worst of these drags. While valuations are elevated, we have repeatedly argued that they are not a constraint to the domestic equity market trading higher, particularly when cyclical tailwinds are building," Todd said.