With Commonwealth Bank shares recently touching a record high of $175.23, many investors are asking the obvious question: what’s keeping Australian bank stocks elevated in the face of economic uncertainty, stubborn inflation, and looming rate cuts? Is it time to look elsewhere?

Between a rock and a hard place

According to Shaw and Partners Senior Investment Adviser Adam Dawes, the answer lies in the flow of capital, not the fundamentals. On Switzer Investing TV this week, Dawes pointed out that large financial institutions and ETFs simply don’t have anywhere better to go.

“It’s a dichotomy we’re really struggling with at the moment,” he said. “No matter how much negativity you want to push into the banking sector, it just continues to stay really nice and full.”

Passive investment flows are a key part of the puzzle. As money moves into index funds and exchange-traded funds (ETFs), those funds must allocate to the largest stocks in the index. That means the big four banks, Commonwealth Bank (CBA), Westpac (WBC), NAB and ANZ, are consistently bid up, regardless of valuation concerns.

“It’s got a lot to do with passive investing, the index buying, the ETFs,” Dawes said. “And where else is a big institution going to put money?”

Even for advisers and fund managers with a more active approach, the decision to lighten bank exposure has been difficult. Despite CBA’s price-to-earnings (P/E) ratio pushing into the mid-20s and dividend yields trending lower, the trade has continued to work.

“It’s probably been the wrong call to sell Commonwealth Bank all the way higher,” Dawes admitted. “I’m guiltier than anyone. I’ve tried to get clients to do it, but they never do, which has probably worked out well for them.”

The banks’ strong capital positions, high return on equity, and consistent dividends make them hard to ignore, particularly when alternative sectors like tech, resources or small caps offer more volatility without guaranteed upside.

Time to look elsewhere, but where?

That said, Dawes believes the conversation is starting to shift.

“We do see on a day-to-day basis the resources getting bid up, then the banks getting sold, and vice versa,” he said. “I think it’s probably time for the resources to do some more heavy lifting in the market.”

He points to iron ore prices still holding above US$100/tonne and early signs of a Chinese fiscal response to US trade tariffs as reasons to watch the commodities space more closely. If the US dollar weakens and China increases infrastructure stimulus, Australian miners could be poised to re-rate.

In contrast, the banks may already be priced for perfection. Investors expecting further outperformance from here may be relying more on momentum than margin.

Want more market insights like this?

Catch Switzer Investing TV on YouTube where Peter Switzer interviews Australia’s top investors, fund managers and economists every week.

To get the show before it hits YouTube - and to join our exclusive Boom, Doom, Zoom livestream where Peter Switzer and Paul Rickard answer your market questions live each week - become a subscriber to The Switzer Report.

Join thousands of investors staying ahead of the market at switzerreport.com.au.