ASX 200 correction will be bear market unless Trump blinks – Macquarie

The Australian stock market has been a rollercoaster in recent weeks, with the ASX 200 experiencing a decline of up to 10% (intraday) from its Valentine’s Day high in 2025. Declines of greater than 10% are typically classified as an official “correction”, by market participants, with the next milestone of a 20% decline classified as an official bear market.

The sharp correction has rattled investors, underscoring the critical need for sound and vigilant portfolio management. But, if you thought the correction was bad, watch out – it could very well turn into a fully-fledged bear market if President Trump doesn’t “blink” with respect to his aggressive trade policies and DOGE cost cutting measures.

This is the view of major Australian broker Macquarie. In a new research note "Australian Equity Strategy - Portfolio Update: Unless Trump blinks, it's a bear", the broker warns investors about the major risks facing both local and international markets, but also that it’s not too late to reallocate capital strategically within one’s portfolio into sectors better equipped to withstand current economic headwinds. Let’s delve into Macquarie’s latest analysis and explore how investors can position themselves in this uncertain environment.

Correction, check, next stop… Bear? 🤔

Macquarie’s research paints a sobering picture of the global economic landscape, heavily influenced by President Trump’s recent policy direction. The broker cautions that “unless Trump blinks and pulls back from trade wars and spending cuts (which currently seems unlikely), there is risk of a material slowing in US real consumer spending.”

Consumer spending slowdowns, Macquarie argues, are “the most consistent signal of a bear”. Further, given the high likelihood of a US spending slowdown this year, the broker warns “we think the conditions are in place for a bear market.”

Several risks underpin this outlook:

1. Trump’s proposed tariffs could increase prices, eroding real household incomes while hampering global growth. The uncertainty surrounding these tariffs – described as a “tariffs yo-yo” – further undermines consumer and business confidence.

2. Government spending cuts could reduce household incomes and employment, amplifying economic pressure. Third, deportations may shrink the consumer base while driving inflation through labour shortages in certain sectors.

3. Sustained equity market declines could trigger a “negative wealth effect,” further curbing spending.

Early warning signs are already emerging, notes Macquarie, who points out that US companies like Delta have issued guidance cuts and layoffs – symptoms of a slowing consumer. For a bear market to be averted, Macquarie believes Trump must pivot away from trade wars and prioritise tax cuts, deregulation, and infrastructure spending. However, the broker notes that the catalyst for such a shift seems distant, suggesting markets will remain under pressure in the near term.

Momentum is broken and FOMO is dead!

Macquarie’s analysts also highlight a seismic shift in market dynamics: The era of momentum-driven gains is faltering. “We think value matters again,” the broker asserts, predicting that the lion’s share of the current “de-rate” will hit last year’s high-flying momentum stocks. Cyclical momentum names, in particular, face a “double whammy” as Trump’s policies slow global growth and trigger earnings downgrades, just as lofty valuations come under scrutiny.

During the momentum-driven market of recent years, investors often chased stocks out of fear of missing out (“FOMO”), sidelining traditional valuation metrics. Much of the recent rally was due to “PE expansion”, notes Macquarie, implying that price rises were not accompanied by commensurate increases in earnings.

But as momentum breaks, Macquarie expects a return to value-focused investing, potentially creating an “air pocket” for so-called momentum stocks, where sellers dominate, and buyers hesitate. So, which sectors are most exposed? The broker points to Banks, Technology, Media, and Discretionary – all trading at elevated multiples relative to their history.

Specific stocks flagged include Commonwealth Bank (ASX: CBA), which Macquarie currently rates “Underperform” – it has a PE Ratio 2.7 standard deviations above its median, and “Neutral” rated names like Pro Medicus (ASX: PME), Hub24 (ASX: HUB), and Technology One (ASX: TNE). The broker acknowledges that even stocks it presently rates as “Outperform”, like JB Hi-Fi (ASX: JBH), Aristocrat Leisure (ASX: ALL), and Slater & Gordon (ASX: SGH) fit the profile for momentum risk.

Macquarie’s proprietary “FOMO Meter” reinforces the current shift in market dynamics. After peaking post-election in 2024 at 1.25, it has fallen 1.66 points to -0.41, marking the first negative sentiment reading since 2023. “Unless Trump blinks, we see the FOMO Meter falling into Fear (below -1.0), which is consistent with a Bear,” the research note states.

While sentiment is now more favourable for buying than late 2024, Macquarie cautions that further declines lie ahead, advising investors to wait until institutional sentiment turns fully bearish before going long.

So, what stocks might be safer in a bear market?

As the ASX 300 PE Ratio drops from its November 2024 peak of 18.8x – two standard deviations above its long-term average – to 1.3 standard deviations above average, investors are rethinking their exposure. Cyclical sectors still command a premium, but a subtle shift toward defensives is underway, echoing mid-2024 trends when unemployment rose, and the Bank of Japan’s rate hike rattled markets. Macquarie argues that “at least in the near term, investors should maintain some overweight to defence in their equity allocation,” with Telecom and Health Equipment & Services emerging as top safe havens.

To adapt, Macquarie has updated its portfolio recommendations, emphasising defence while dialling back momentum:

• Health remains their top overweight, with additions like Ramsay Health Care (ASX: RHC) (recently upgraded to “Outperform” from “Neutral”) and positive weighting tweaks for sector leader CSL (ASX: CSL).

• Consumer Staples ranks second, with overweight positions in supermarket operators Coles Group (ASX: COL) and Woolworths (ASX: WOW).

• In Resources, Macquarie favours gold miner Newmont (ASX: NEM), and has boosted its weighting allocation to BHP Group (ASX: BHP).

• Naturally, momentum winners like CBA, Charter Hall (ASX: CHC), and others (Goodman Group (ASX: GMG), IAG Group (ASX: IAG), Aristocrat Leisure, Xero (ASX: XRO), and Light & Wonder (ASX: LNW)) are trimmed in favour of unloved value plays like ANZ Group (ASX: ANZ) (transition from CBA), GPT Group (ASX: GPT), and IDP Education (ASX: IEL).

This rebalancing aims to mitigate the risk of a deepening bear market while capitalising on undervalued opportunities. “The goal is to add more to unloved stocks with more value and reduce exposure to momentum,” Macquarie explains.

Conclusion

Macquarie’s outlook draws parallels to October 2023, when a dovish Federal Reserve pivot lifted U.S. stocks from a trough. A similar reprieve could emerge, notes the broker, predicting that central banks may eventually cut rates to counter a deteriorating growth cycle. Macquarie also points out here, that the bond market is already factoring such a scenario via lower bond yields.

But “Trump’s policies could mean that surprises are more negative than the path implied by the change in US bond yields.” Without a retreat from tariffs and spending cuts, rate cuts probably won’t come soon enough to halt the downturn – at the end of the day, the make or break for correction, bear, or bull, is Trump – asserts Macquarie. “Until Trump pivots, we would expect the Downturn pattern to continue,” the broker warns.

For investors, the message is clear: Vigilance is paramount. Reviewing one’s exposure to momentum stocks – many of which thrived in 2024 but now face significant de-rating – and bolstering defensive allocations could prove critical.

This article first appeared on Market Index on 17 March 2025.