Different ASX share sectors can offer investment opportunities at different times, depending on profit trends and the wider economy.

The last few years have seen significant volatility, with areas like ASX travel and iron ore shares going through multiple seismic shifts since the onset of COVID-19.

It's common for individual companies to see varying results through an economic cycle – only some businesses are leaders and winners. However, when entire sectors go through booms or slumps, it can attract my attention.

It's not a case of avoiding every business from one industry while every business from another sector is a buy. But, I am closely monitoring the two areas below for different reasons.

Cautious on ASX bank shares

It's no secret that ASX bank shares like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) rose strongly in 2024.

This was a somewhat strange performance, considering the earnings results of those businesses did not exactly shoot the lights out. For example, in the first quarter of FY25, CBA reported cash net profit after tax (NPAT) was flat year over year. While income increased, the bank's operating expenses grew by 3% because of wage inflation and increased investment spending.

Other banks face a similar picture, with rising expenses and a struggle to grow net income significantly due to the high competition in the sector for loans and deposits.

I think ASX bank shares are now generally trading at an expensive price/earnings (P/E) ratio compared to their historical valuations. The higher the valuation, the lower the margin of safety that we have as investors. Also, higher P/E ratios translate into a lower dividend yield, which reduces the potential future returns.

For example, according to the independent estimates on Commsec, the CBA share price is valued at 24x FY25's estimated earnings with a forecast fully franked dividend yield of 3.2%.

I'm cautious about these high bank valuations because competition could hurt lending margins, and rising arrears could harm net profit, yet P/E ratios are relatively high for these ASX shares.

Contrarian buy on REITs

If I had to choose one sector that could do well in 2025, bearing in mind their starting valuations, I would choose real estate investment trusts (REITs).

High interest rates have been a real headwind for commercial properties. The higher cost of interest rates has hampered rental profits, while property valuations (and share prices) have also been hit.

However, interest rates seem to have peaked and may soon start going down in Australia. Not only could this boost property values, but I also believe it could lead to some of the discount between the share price and net asset value (NAV) per unit closing up as investors begin searching for yield if bonds and savings accounts aren't as attractive.

REITs like Centuria Industrial REIT (ASX: CIP), Charter Hall Long WALE REIT (ASX: CLW), Rural Funds Group (ASX: RFF) and Charter Hall Retail REIT (ASX: CQR) are currently all trading on double-digit price-to-book discounts with large distribution yields. I'm quite optimistic the REIT sector can outperform the S&P/ASX 200 Index (ASX: XJO), particularly if there's at least one RBA rate cut in 2025.