It has indisputedly been a phenomenal time to own ASX shares in recent years. Both 2023 and 2024 delivered outsized gains for the S&P/ASX 200 Index (ASX: XJO), well above the long-term average for Australian stocks. This trend is on track to continue in 2025 as well, with the ASX 200 presently up a rosy 8% or so year to date.
After such encouraging returns, it can be tempting to think this will simply go on forever. However, that thinking could be dangerous.
It's worth noting that I am a long-term optimist about ASX shares. Our markets have always performed well historically. ASX shares go up far more often than they go down. Additionally, the ASX 200 has never failed to exceed a previous all-time high. I think these two facts, these guiding lights, will still ring true years from now.
However, I am seeing some warning signs in the market today that indicate the outlook for ASX shares over the next three years might not be as upbeat as it has been over the last three.
Are ASX shares due for a reckoning?
Of course, no one, including this writer, knows what the markets will do on any given day, month, year, or period. For all I, or anyone else, knows, the ASX 200 could be at 6,000 points or 16,000 points in September of 2028.
One of my favourite investing quotes comes from Warren Buffett's mentor, Benjamin Graham. Graham once described the stock market as a "voting machine" in the short run but a "weighing machine" in the long run.
It's the weighing part that has me worried.
Put simply, by my assessment, the runups in the prices of the most prominent ASX shares over recent years have not been matched by underlying profit growth. Instead, these ASX shares have achieved new heights mostly due to the inflating price-to-earnings (P/E) ratios that investors seem willing to pay for them.
We've seen this happen to ASX shares ranging from Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) to Wesfarmers Ltd (ASX: WES), Coles Group Ltd (ASX: COL) and Telstra Group Ltd (ASX: TLS).
P/E ratios and dividend yields
These prominent ASX blue-chip stocks have all seen their earnings multiples reach unprecedented heights in 2025, mainly thanks to P/E ratio expansion. A few years ago, it would have been unthinkable to see CBA at an earnings multiple of 27.7, for example, Coles at 29.2, or Wesfarmers at 36.2.
While these ASX shares have reached new heights, their dividend yields have conversely hit all-time lows. CBA used to yield north of 4%. Today, it is offering a yield of under 2.9%. We could say the same for Coles, which has also gone from offering a 4%-plus yield just a year or two ago to under 3% right now.
Sure, these companies are still growing their profits and earnings, but not nearly as quickly as their share prices have been climbing. Take Wesfarmers. This conglomerate reported underlying profit growth of 3.8% for the 2025 financial year to $2.65 billion, yet its ASX share price rose by almost 30% over that same period.
This sort of artificial stock price growth is not sustainable in my view, given the 'weighing' part of Graham's maxim.
As such, I can only conclude that ASX shares are due for some kind of reckoning. What that entails is the real question.
