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The rally from down under – are Aussie stocks unstoppable?

Greg Wood | AFP | Getty Images

As Australian stocks power to fresh five-year highs, analysts say the country's benchmark index is set for further gains amid expectations for positive earnings over the next few weeks.

On Tuesday, stocks on the S&P ASX 200 hit a five-year high for the third consecutive session, trading around the 5,370 level mid-morning. Stocks are up 15.5 percent year to date, not far behind the S&P 500's 20 percent year-to-date gain on Wall Street.

Analysts say better economic data from Australia's major trading partner, China, coupled with the end of political uncertainty in the U.S., has helped boost sentiment. Furthermore, the election of a new Australian government in September brought an end to a prolonged period of political uncertainty and boost business confidence.

(Read More: Australia's election is over, now what for the economy?)

Although some analysts are starting to describe the market as overvalued, others say the good times are far from over, and strong earnings expectations combined with supportive macro-economic drivers are set to power the market even higher.

"I wouldn't be surprised to see [the ASX] end the year higher than it is now. I don't see any signs of any disappointing earnings coming up," said Clay Carter, head of international equities at Perennial Investment.

On Tuesday global mining giant BHP Billiton, which is the second-largest firm on the ASX, reported strong quarterly earnings propelling its stock 2.5 percent in morning trade. The firm reported a 23 percent on-year increase in iron ore production in July to September on the same period last year.

(Read More: Is Australia's rate-cutting cycle over?)

Evan Lucas, market strategist at IG, said BHP's strong earnings were a sign o things to come.

"BHP's earnings were nothing short of stellar. This is a leading indicator as to where the market could go," said Lucas.

And in the coming weeks, three of Australia's largest banks – Australia & New Zealand Banking Group, National Australia Bank and Westpac – also among the top five largest stocks on the index, are set to report strong numbers, said Lucas.

Lucas said he expected the ASX to hit an important technical level – 5,421 – in the next few weeks, but said there was a risk that the index could see either a period of consolidation or a sharper pullback once it hits this level.

(Read More: Is the Aussie dollar heading for parity?)

But ultimately, positive macro-economic tailwinds, including improvements in China's economic outlook, along with more evidence of stabilization in the U.S. should guarantee that the ASX will recover and end the year having made "stand-out" gains.

"The risk-on trade is here, and most Australian assets are risk-on trades," he added.

(Watch This: Housing shortage in Australia is structural)

However, other analysts who spoke to CNBC voiced concerns about the market looking overvalued at current levels.

"We're struggling to find value on an individual company level, and usually when we struggle to find value it precedes either the market selling off or going sideways as earnings catch up with share prices ," said David Walker, head of equities research of StocksInValue.

Walker said he expected the index to fall nearly 7 percent from current trading levels.

"We're running above average cash weightings as we're a little bit cautious. We're not calling the market a screaming sell - it's modestly overvalued our valuation is closer to 5,000," he added.

(Read More: Why the Aussie is a 'screaming buy': Economist)

— By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

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