ASX 200 hits two-month high, but UBS warns gains are 'vulnerable'

The S&P/ASX 200 has staged an impressive recovery, surpassing its levels before President Trump’s April 2, 2025, “Liberation Day” announcement, which sent shockwaves through global markets.

The market is now trading 2% above April 2 levels and up over 10% from its April 7 low. Meanwhile, major US, European, and Asian benchmarks remain below their pre-tariff levels. However, analysts warn that these gains may be fragile, with economic uncertainties and potential earnings downgrades on the horizon.

S&P/ASX 200 year-to-date price chart | 2 Apr/Liberation Day marked red (Source: TradingView)

Why the ASX is outperforming

UBS analysts attribute this “Aussie exceptionalism” to several structural advantages:

1. Low tariff risk: Australia’s lack of a trade surplus with the US reduces the likelihood of targeted tariffs.

2. Flexible exports: Australian exports to the US, primarily agricultural, can be redirected to other markets more easily than manufactured goods.

3. Domestic focus: Many ASX 200 companies rely heavily on local revenue, shielding them from global trade disruptions.

These factors have drawn global investors to Australia’s relative stability, fueling capital inflows. Yet, UBS cautions that the rally may be outpacing fundamentals, with economists slashing GDP growth forecasts for 2025 and 2026, signaling weaker corporate earnings ahead.

Earnings Clouds on the Horizon

Despite the ASX 200’s rebound, analysts anticipate a wave of disappointing corporate updates. A recent UBS report highlights fading earnings momentum, with analysts likely to downgrade near-term profit forecasts as recovery hopes shift to 2026. Heightened uncertainty from US trade policies has also increased the risk premium investors demand, potentially weighing on stock valuations.

Reflecting this caution, UBS lowered its year-end ASX 200 target from 8,850 to 8,150 (current level: 8,100). The investment bank advises reducing portfolio risk, favoring sectors like insurance, technology, media, and telecom (TMT) for their domestic focus, while recommending an underweight stance on energy and banks due to their weaker earnings outlook.

Sector Shifts and Strategic Picks

UBS has recalibrated its sector recommendations to navigate the uncertain landscape:

• Healthcare has been upgraded to neutral from underweight, driven by attractive valuations. Its price-to-earnings ratio relative to the ASX 200 has dropped to 1.4x, below the long-term average of 1.6x, with earnings downgrades potentially nearing a bottom for large-cap stocks.

• Industrials have been downgraded to neutral from overweight due to exposure to a softening US economy, and investors are advised to favor domestically focused companies to mitigate risks.

• Insurance remains overweight, though February 2025 results suggest peak conditions for Aussie insurers. Analysts believe the sector offers one of the best combinations of pricing power, valuations, and domestic earnings.

• TMT remains overweight as Australian companies in this space tend to outperform during periods of economic weakness.

• Banks and Energy stay underweight. Safe-haven flows have lifted bank valuations, but looming interest rate cuts could pressure earnings. Energy faces challenges from falling energy prices, and while the sector appears cheap, UBS argues it’s not ‘cheap enough’ given the poor macro environment.

UBS added three companies to its most preferred stock list, joining names like BHP, QBE Insurance, Brambles, Telstra, and more:

• Seven Group: Benefits from robust mining and infrastructure activity.

• Technology One: A domestically focused tech firm with projected 20% annual profit growth over five years.

• Steadfast: An insurance broker with defensive qualities and exposure to resilient small businesses.

Investor Takeaways

The ASX has defied global turbulence, buoyed by its structural advantages. However, softening economic growth and potential earnings downgrades could temper the rally. Investors may find opportunities in domestically oriented sectors like insurance and TMT, while exercising caution in energy and banks, where earnings momentum is waning. As Australia’s quarterly reporting season kicks off, the market’s next moves will depend on whether companies can meet guidance — or face a reality check.