ASX tipped to collapse 20pc as profit alarm bells ring Alex GluyasDeputy markets editor
May 28, 2025 – 3.46pm
Australia’s sharemarket is on the precipice of a near-20 per cent collapse as a downturn in company earnings delivers a brutal reality check to sky-high valuations and complacent investors who have been riding the wave of passive money flowing onto the bourse.
MST is warning clients that expected volatility in the sharemarket will drag the ASX 200 below 7000 points this year, representing a 19 per cent plunge from current levels and more than 20 per cent below its recent peak.
“Over the last two years the Australian equity markets has been carried higher by a combination of buoyant global economic activity, large superannuation inflows and little equitisation,” MST senior analyst Hasan Tevfik wrote in his quarterly outlook, referring to the lack of IPOs pushing more investor money into bigger stocks.
“We expect a bear market to take hold in Australia as the US economy succumbs to contraction.”
The local sharemarket, which touched a three-month high this week, has benefited from an exodus from Wall Street as US President Donald Trump’s erratic trade policies prompted investors to reallocate capital away from the world’s largest economy.
Passive investors, including index funds and benchmark-conscious managers, have poured $US2.2 billion ($3.4 billion) into Australian exchange-traded funds this year, according to JPMorgan. Inbound flows spiked to nearly $US800 billion in April, after Trump announced sweeping tariffs on “liberation day”.
An outsized portion of that money has flowed through to the ASX giants, including the banks, helping to explain the strong rally in stocks such as Commonwealth Bank and Wesfarmers, which have both hit record highs this month.
“Australia has likely benefited from global investors rotating out of regions more directly affected by US tariffs, such as the US itself, and into perceived safe havens like Australia,” said JPMorgan’s head of Australian equity research, Jason Steed. “This shift will reshape capital allocation.”
Bell Potter has also sent out a warning to clients about a “tough environment for company earnings” and noted that the mining sector remained a notable drag on the ASX’s profit outlook, with earnings expected to contract 15 per cent in the 2025 financial year.
The heavyweight mining companies and the financial sector are expected to post low single-digit earnings growth in FY26 and FY27, heaping further pressure on the sharemarket’s profit outlook.
“The ASX 200 is currently in a downgrade cycle and has been for a few years,” warned Bell Potter equity strategist Paul Basha.
“With very few bright spots from a top-down, sector perspective, it reinforces our call from earlier this year that we’re operating in a market where a micro over macro discipline is more crucial than ever.”
While MST believes the sharemarket will drop below 7000 points in the short term, it is tipping the benchmark to rebound by the end of the year as central banks are forced to ease monetary policy further.
Tevfik is tipping another three rate cuts from the Reserve Bank this year, and believes the US Federal Reserve will slash rates by a full percentage point this year, including a jumbo 50 basis point move in December.
Still, MST cut its year-end target for the ASX 200 to 8000 points, from 8500 points previously, and warned there were downside risks to its forecast.
The main upside variable involves more exuberant valuations, perhaps reaching the “bubblish levels” of the late 1990s when the sharemarket traded at a PE ratio of more than 20 times. In that scenario, the ASX 200 should sail through 9000 points, Tevfik said.
