I’m worried about the ASX 200 falling further. Here’s why

It’s been a fairly miserable time for the S&P/ASX 200 Index (ASX: XJO) over the past few months. The ASX 200 started 2026 off on a strong note, rising by a healthy 5.4% between early January and early March. But the Iran war put a stop to that, with the index now down about 6% since 2 March.

Things haven’t been looking up more recently either. Since the middle of April, the ASX 200 has retreated by around 3%.

Over the past six months, the Australian share market has also lost about 2% of its value. This is the period I’d like to focus on.

Back in early November, the ASX was still basking in the afterglow of the August interest rate cut that the Reserve Bank of Australia (RBA) delivered. That was the third RBA rate cut of 2025, bringing the cash rate down to 3.6%.

Since then, the RBA has dramatically reversed course. Take the interest rate hike that was announced just today. If we combine it with February and March’s hikes, all three of 2025’s rate cuts have been nullified. Today, the cash rate is back to 4.35%, exactly where it was at the start of 2025.

Do higher interest rates mean lower ASX 200 shares?

Under typical financial logic, rate hikes are bad news for the share market. This is due to two factors. The first is that a higher cash rate tends to change the way investors value ASX shares by boosting the risk-free return available from government bonds. A higher risk-free rate means that shares need to deliver higher profits to justify the same valuation.

The second factor is the increased appeal of ‘safer’ assets thanks to the higher rates. Many investors will simply opt for a term deposit or government bond over a dividend-paying share if they can get a better interest rate on the safer investments. This latest hike could pull term deposit rates well over 5.5%. That looks pretty good against the kinds of yields that the likes of Commonwealth Bank of Australia (ASX: CBA), Telstra Group Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) are currently sporting.

So, by all accounts, the three interest rate increases we have seen in 2026 so far should have a fairly significant impact on the overall ASX 200 Index. Yet it is seemingly not. Despite these rate hikes and despite the clear economic damage that is being caused by the closure of the Strait of Hormuz, investors have sent the ASX 200 down 2% over the past six months.

Something doesn’t seem right to me. That’s why I think there’s a good chance the ASX 200 Index will continue to drift lower in the coming months. I could be wrong. But I also believe in reversion to the mean.

The post I’m worried about the ASX 200 falling further. Here’s why appeared first on The Motley Fool Australia.

More reading

• Own Wesfarmers shares? It’s expanding into modular apartment construction
• CSL, Wesfarmers, Endeavour shares crash to multi-year lows: Buy, hold, or sell?
• 5 things to watch on the ASX 200 on Wednesday
• Infratil shares: CDC inks Australia’s largest data centre contract
• My 3 favourite ASX 200 dividend shares for passive income

Motley Fool contributor Sebastian Bowen has positions in Wesfarmers. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool Australia has recommended Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.