In December, Shane Oliver predicted the ASX 200 would likely reach 8,800 by the end of 2025 but warned of a volatile year, anticipating a 15 per cent correction as “highly likely”.
“Global and Australian shares are expected to return a far more constrained 7 per cent in the year ahead,” AMP’s chief economist said at the time.
On Tuesday morning, more than $49 billion was wiped from the Australian share market after US President Donald Trump suggested his tariff policies could spark a recession and inflation. The decline mirrored a sharp sell-off on Wall Street, where the Nasdaq Composite fell 4 per cent and the S&P 500 dropped 2.7 per cent.
Speaking to InvestorDaily following Tuesday’s rough start, Oliver described the market volatility as part of an ongoing correction that has been unfolding over the past three weeks.
US and Australian stock markets have seen significant declines, with US shares down about 9 per cent and Australian shares down around 8 per cent from recent highs. Investor concerns over Trump’s tariff policies have been a major driver of the downturn.
“Basically, it’s a reaction to Donald Trump,” the chief economist said. “The market was already vulnerable.”
Prior to this correction, the Australian share market was considered overvalued, with price-to-earnings (P/E) ratios around 20x, surpassing normal levels. Additionally, the earnings yield had fallen to levels offering minimal risk premium over bond yields.
In the US, Oliver said the situation was even more dire due to its higher P/E ratios compared to other markets, making it more sensitive to shifts in investor sentiment and economic policy uncertainties.
“The overvaluation that we had seen in markets after two years of pretty strong gains without much in the way of a correction had left shares overvalued and over-loved. And Donald Trump has turned out to be the trigger for the correction,” Oliver said.
The chief economist suggests that markets could have remained overvalued if not for the volatility triggered by Trump’s policies.
“He has raised question marks around the earnings outlook basically. The tariffs will have a negative impact on profits for US companies, they run the risk of triggering a recession in the US, and we’ve also got a growing global trade war,” Oliver said.
“And we’ve got more tariffs ahead of us. We’ve got tariffs on multiple industries. Trump’s talked about semiconductors, cars, pharmaceuticals, steel tariffs, aluminium tariffs. We’ve also got reciprocal tariffs … This is all creating a lot of uncertainty for investors,” he added.
On the home front, the Australian market was already facing some challenges, compounded by uncertainties over a potential tariff war impacting local export demand. Namely, while local banks initially performed strongly, their gains were later overshadowed by weakness during the earnings reporting season.
Over the past month, Commonwealth Bank has seen its share price drop by 9 per cent, while Westpac is down 10 per cent, NAB has fallen 15 per cent, and ANZ has declined 6 per cent.
However, Trump remains the primary source of concern for Australian markets as well.
“The basic factor here is the uncertainty created by Donald Trump’s trade war,” Oliver said.
Reflecting on his prediction of a 15 per cent market correction, Oliver noted that while investors anticipated “the bad news to come”, many had expected positive developments from the US to emerge first.
“That’s surprised many investors, that he has gone so hard on the bad news,” the chief economist said, adding that the extent of Trump’s erratic behaviour has also been unexpected.
“The comments coming out of the White House have been a lot more unsettling.”
Ultimately, Oliver said it’s still too early to call the correction over.
“I’d say it’s potentially another few months before we can get confident about things,” he said, adding he stands by his 15 per cent correction prediction.
