The ASX 200 is on a three-day winning streak. Is the worst over?

The S&P/ASX 200 is enjoying a three-day winning streak, its longest since the 12-14 February run that propelled the market to a record close of 8,555. After rebounding sharply from a nearly 10% correction, one can’t help but wonder: Has the selling pressure finally subsided?

Why are markets bouncing?

The S&P/ASX 200 reached a peak drawdown of 9.4% on March 13, plunging the market into its most oversold state since June 2022, when it shed roughly 11% in two weeks amid fears of aggressive central bank rate hikes. Oversold markets tend to rebound eventually, with some of the biggest single-day gains often emerging during corrections or bear markets.

On Monday, the heavyweight materials sector provided a boost, buoyed by a wave of stronger-than-expected economic data from China. This hinted at resilience in the Chinese economy despite looming US tariffs threatening growth. Key highlights from the data included:

• New and existing home prices dipped by 0.14% and 0.34%, respectively, month-on-month in February—a modest decline compared to steeper drops seen throughout much of 2024.

• Industrial production rose 5.9% in January-February, surpassing market forecasts of 5.3%.

• Retail sales climbed to 4.0% in the same period, up from 3.7% the prior month and marking the strongest growth since October 2024.

• Fixed asset investment surged to 4.1% in January-February, accelerating from 3.2% and hitting its highest level since April 2024.

Lynn Song, ING Bank’s chief economist for Greater China, offered a cautious yet balanced outlook: “Significant uncertainties persist, but at this point, we see upside and downside risks as roughly even from our latest forecast.” He added, “China rarely misses its growth targets, and we anticipate continued policy support to cushion the tariff impact on growth this year.”

This encouraging data fueled a rally among the ASX 200’s major miners on Monday, with standout performers including Mineral Resources (+11.5%), Pilbara Minerals (+7.1%), Fortescue (+4.1%), Paladin Energy (+3.7%), and BHP (+2.4%).

Where to from here?

Since 2000, the ASX has experienced 15 corrections of 10% or more (in other words, a correction every one and a half years). The forward returns from previous corrections paint a rather compelling picture about why dip buying can be a smart move.

Source: Market Index

As it stands, the market remains oversold, and this is the critical moment where its direction hangs in the balance. Can it stabilise and edge upward from here? An oversold market signals weakness, and often drives further volatility and whip-saw like action.

The data to watch

The recent pullback in the ASX 200 has trimmed its price-to-earnings (PE) ratio to 16.7x, down from a high of 18.3x on February 14. While this marks a retreat, the market still sits well above its long-term average of 14.7x.

Source: Morgan Stanley

A major factor in whether the market can steady itself hinges on President Trump and the turbulent tariff landscape. His latest measures, effective February 2025, impose a 25% tariff on Canadian and Mexican imports—with some energy exemptions—and a 10% rate on Chinese goods. Looming even larger is the U.S.’s "Fair and Reciprocal Plan," set for announcement on April 2, 2025. This initiative aims to level the playing field by matching tariffs, taxes, and trade barriers imposed on the U.S., potentially reshaping trade dynamics across a broad swathe of products and nations.

This tariff uncertainty is already rippling through market and economic forecasts. The S&P 500 has seen its first-quarter EPS estimates drop by 3.8%. Citi warns that these tariff effects aren’t fully reflected in current guidance or consensus, priming markets for a flurry of negative pre-announcements in the coming three weeks. The fallout is also evident in the Atlanta Fed’s GDPNow forecast, which now projects a -2.1% U.S. GDP growth for Q1. Should this hold, it would mark the first negative growth quarter since 2022.

Overall, the recent rebound can largely be attributed to oversold conditions and the absence of further tariff escalation. However, a long list of uncertainties persists, keeping us in a "wait and see" mode. One thing seems almost certain: volatility will remain elevated.