S&P/ASX 200 Index (ASX: XJO) shares are down 0.7%, and the bank shares are underperforming on Tuesday.
At the time of writing, the Commonwealth Bank of Australia (ASX: CBA) share price is $162.99, down 1% today.
The National Australia Bank Ltd (ASX: NAB) share price is $37.54, down 1.9%.
ANZ Group Holdings Ltd (ASX: ANZ) shares are $35.37 apiece, down 1.1%.
Westpac Banking Corp (ASX: WBC) shares are also 1.1% lower at $36.38.
Macquarie Group Ltd (ASX: MQG) shares are down 1.5% at $233.95.
Today, the world is waiting for further news on an impending US-Iran deal that would reopen the Strait of Hormuz.
Oil prices have dropped significantly in anticipation of the key shipping channel reopening after nearly three months of effective closure.
The Brent Crude oil price is currently US$97.72 per barrel, down 12% in a week.
Regardless of when the war ends, economists say the full economic effect of the oil shock is yet to play out.
The question is not whether the impact will be bad, but rather, how bad.
The Australian Bureau of Statistics reported today that 72% of Australian businesses are under pressure due to higher fuel costs.
Higher petrol and diesel prices, along with three interest rate rises this year, have contributed to a multi-year low in consumer sentiment.
Rates have gone up due to resurgent inflation. That started before the war began, and it's now been exacerbated by higher fuel prices.
We've also just seen the first sign of a weakening jobs market. Unemployment rose to 4.5% in April amid 18,600 job losses.
On top of all that, proposed changes to capital gains tax (CGT) are worrying businesses and investors in shares and property.
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Top broker predicts impact of CGT tax changes
In a new note, analysts from top broker Morgan Stanley said softer mortgage growth and margin headwinds stemming from the proposed CGT changes could result in FY27 earnings downgrades of about 5% for the major ASX 200 bank shares.
This is because the banks are highly exposed to the residential housing market, which is already weakening due to higher interest rates.
The analysts said a deterioration in housing market sentiment would raise the probability of lower valuation multiples for bank stocks.
Concern about the impact of CGT changes was partly behind a 10% daily drop for CBA shares earlier this month.
That was the biggest one-day fall for CBA shares ever.
It followed the bank's 3Q FY26 update, which was released the morning after the Federal Budget.
CBA reported an unaudited cash net profit after tax (NPAT) of $2.7 billion, down 1% on the quarterly average for 1H FY26.
Investors also noticed the $200 million increase to bad debt provisions, which CBA attributed to higher geopolitical and economic risks.
Will ASX 200 bank shares fall?
ASX 200 bank share price movements are often seen as a barometer of investor confidence in the economy.
And right now, the economy isn't looking great.
Consumer confidence is near pandemic lows; higher inflation and interest rates are expected; we have entrenched low productivity growth; the first signal of a weakening jobs market; and the impending long-tail impact of the global oil shock and changes to CGT tax on top.
Additionally, when any ASX stock trades on a stretched valuation, it's natural to assume that mean reversion will occur at some point.
ASX 200 bank shares have been on the up since November 2023. The big five have all reset their record highs over the past year.
The following chart showing percentage changes in ASX 200 bank share prices since November 2023 paints a picture.
Portfolio manager Suhas Nayak from contrarian fund manager Allan Gray says the major ASX 200 banks are trading at rich levels today.
Four of the major five are trading on a price-to-earnings (P/E) ratio of 18 times to 19 times, compared to the historical average of 12 times.
And CBA shares are out on their own at 26.7 times.
Nayak told The Australian that this presents a risk for share prices:
It just exposes you to valuation risks across those particular companies that have done particularly well.
What about bank dividends?
An additional factor that may increasingly weigh on ASX 200 bank shares is their declining dividend yields.
As ASX 200 bank share prices have stormed higher, earnings have not kept pace, so dividend yields have reduced.
This makes ASX 200 bank shares less attractive to investors focused on passive income. (Find out current bank dividend yields here).
Nayak said:
The total returns from here look not as appealing as many other parts of the market.
Morgan Stanley has a sell rating on CBA, Westpac, and NAB shares today.
The broker gives a buy rating to ANZ and Macquarie shares.
