The Australian stock market has made a strong comeback, with the S&P/ASX 200 index reaching its highest point in two months. This rise follows a tough period caused by tariff announcements known as “Liberation Day,” which unsettled global markets.
However, UBS analysts warn that this upward trend might not last due to economic uncertainties and possible earnings downgrades ahead.
The ASX 200 has recovered impressively, surpassing its pre-tariff levels and climbing over 10% from its low on April 7. This “Aussie exceptionalism” comes from several advantages, including low tariff risk since Australia does not have a trade surplus with the US, flexible exports that can shift to other markets, and many companies focusing on the domestic market.
These factors are drawing global investors looking for stability, increasing capital flow into the Australian market.
Despite this, UBS cautions that the rally may be outpacing economic fundamentals. Economists have lowered GDP growth predictions for 2025 and 2026, pointing to weaker corporate earnings ahead. A recent UBS report highlights fading earnings momentum, indicating that analysts may downgrade profit forecasts soon.
The investment bank has also lowered its year-end ASX 200 target from 8,850 to 8,150 and advises investors to reduce risk by favoring sectors like insurance, technology, media, and telecom (TMT). They suggest being cautious with energy and banks due to their weaker earnings outlook.
UBS has adjusted its sector recommendations. Healthcare has moved from underweight to neutral, thanks to appealing valuations. On the other hand, industrials have shifted from overweight to neutral due to their exposure to a slowing US economy.
Investors should focus on companies that cater primarily to the domestic market to reduce risks. While the recent performance of the ASX 200 shows a resilient market, investors need to remain careful and ready for possible downturns as economic conditions change.