The S&P/ASX 200 Index (ASX: XJO) dipped then flipped in morning trading on Tuesday.
The benchmark index is currently up 0.12% to 8,418.7 points.
In the first hour of trading, the index fell to an intraday low of 8,386.5 points, down 0.27%.
This followed a sell-off on Wall Street last night. The S&P 500 Index (SP: .INX) fell 1.46%, and the Nasdaq Composite Index (NASDAQ: IXIC) closed 3.07% lower.
This was sparked by news of a lower-cost, more energy-efficient competitor to ChatGPT released in China.
The ASX 200 has since rebounded, but tech shares and property shares with data centre exposure remain in the red today.
What's the outlook for the ASX 200 in 2025?
The ASX 200 rose by 7.49% last year, with total gross returns (including dividends) of 11.44%.
This was a pleasing result but not as impressive as US share market returns. The S&P 500 Index rose by 23.31% in 2024, with total returns (including dividends) of 25.02%.
Looking ahead, Morgan Stanley predicts the ASX 200 will rise to about 8,500 points by year's end. This implies an extremely modest potential uplift of 0.95% on the index's value at the time of writing.
Dr Shane Oliver, Chief Economist at AMP Ltd (ASX: AMP), tips the ASX 200 to rise to 8,800 points, a potential 4.5% increase. But he predicts a volatile ride with a "highly likely" 15% correction along the way.
In an article, Dr Oliver wrote:
Stretched valuations after two strong years, the ongoing risk of recession, the likelihood of a global trade war and ongoing geopolitical issues will likely make for a volatile ride in 2025 …
In Morgan Stanley's new year forecast, the broker said the ASX 200 was likely to lag other major developed markets this year, particularly the US.
The broker said company earnings needed to improve for "any meaningful upside from here" for the ASX 200.
Darren Thompson, Head of Asset Management at Equity Trustees Asset Management, expects ASX 200 market earnings to be flat or lower in FY25 compared to FY24, with banks and miners dragging the index down.
He says domestic GDP growth is likely to remain at or below 2% in CY25 "as the lagged impact of higher interest rates and weakening consumer spending continue to bite".
He says many businesses will face margin pressures "as rising costs are less able to be passed on to a weakening consumer".
Thompson predicts a rate cut in May and only a 25 to 50 bps reduction over the 2025 calendar year.
He foresees potential weakness in commodity prices, notably iron ore, impacting the major miners.
He also tips flat earnings from the ASX bank shares due to modest credit growth, ongoing competition restricting net interest margins, ongoing cost pressures, and already cyclically low bad debt provisions.
What about dividends?
Lower earnings among ASX 200 companies will have a flow-on effect on dividends, Thompson says.
Overall, he expects dividends to be "slightly down" overall in FY25 compared to FY24.
However, this incorporates "materially lower" dividends from BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO), and Fortescue Ltd (ASX: FMG) shares due to lower realised iron ore prices.
Thompson says:
While many sectors of the Australian market are expected to deliver earnings and dividend growth going forward … they are not of sufficient scale to compensate for the impact of the materials and energy sectors.
The impact of these factors is such that the Australian equity markets 12-month forward dividend yield is ~3.4%, which is well below the 10-year average.
Impact of Donald Trump and the weak Chinese economy
Thompson says Donald Trump's return to the US Presidency and his various initiatives, including tariffs on all trading partners, may add to global inflationary pressures and lead to higher-for-longer interest rates.
This creates risk for ASX 200 shares, which are already trading on high valuation multiples.
Thompson says:
Equities [are] trading on high valuation multiples (such as price to earnings) versus long-term averages, particularly given relatively low near-term earnings growth.
In our view this leaves little buffer to absorb adverse developments.
He adds that the Chinese economy, which Australia is directly tied to, is weak and "recent monetary and fiscal support measures look to us to fall short of what is required to meaningfully revive demand".
Thompson warns of "an arguably complacent assessment of embedded risks" for ASX 200 shares.
Share market strength has been driven by price-earnings (PE) multiple expansion rather than earnings growth, resulting in historically stretched valuation metrics …
Overall, much of the good news anticipated for CY25 appears priced into market expectations and investors should expect much more muted capital returns and flat or lower income in the year ahead.
