The Australian sharemarket suffered its steepest one-day drop since April’s “liberation day” tariff sell-off, as investors dumped major bank stocks on concerns about stretched valuations following recent strong gains.

The S&P/ASX 200 fell 1 per cent, or 89 points, to close at 8668.20 – down from Friday’s record high, but still the second-highest close on record.

The drop was nearly twice the size predicted by ASX futures, which had pointed to a 49-point decline.

After the bourse posted its strongest weekly gain since May – fuelled by confidence that the Reserve Bank will cut interest rates next month – IG market analyst Tony Sycamore said signs were emerging of investors locking in profits following three record highs in the past six sessions.

“It has come a little bit out of the blue (this sell-off), with little clear catalyst for the sharp drop in shares, which suggests profit taking,” he said. “It has closely resembled a lot of those pushes we saw in March and August last year – a repeat performance.

“The banks have been front and centre of this sell-off — whether people now think margins are going to compress because interest rates are going lower for the big banks… but there’s no doubt that the big bank valuations are stretched.”

Financials – off by 2.2 per cent – paced nine of the 11 index sectors lower in afternoon trade, reversing Friday’s strong gains. Westpac dropped 3.6 per cent to $33.07, Commonwealth Bank by 2.5 per cent to $177.87, ANZ 2.5 per cent at $30.05 and National Australia Bank declined 2.4 per cent to $38.25.

AMP defied the sell-off in the sector, rising 9.8 per cent to a five-month high of $1.69 following a strong second-quarter update. Its superannuation arm posted its first positive net inflows since 2017, supported by platform growth and higher assets under management.

South32 also outperformed, gaining 4.5 per cent after reporting it had achieved 102 per cent of full-year production guidance, buoyed by solid output across key commodities in the June quarter.

Materials were slightly higher as Singapore iron ore futures climbed to a four-month high as China’s plan for a mega dam in Tibet bolstered the outlook for demand.

The steel-making material futures for an active contract jumped 3.3 per cent to $US104.10 per tonne, following a run of four weekly gains. Higher prices pushed Fortescue Metals up by 1.7 per cent to $17.25, Rio Tinto by 1.2 per cent and BHP was 0.4 per cent higher after Macquarie cut the miner to neutral.

Stocks in focus

In company news, Insignia Financial fell 5.8 per cent to $3.93 after telling investors it remained in talks with $3.4 billion bidder CC Capital, but stressed there was no certainty the discussions would lead to a formal offer.

Afterpay owner Block jumped 11.2 per cent after the announcement that it would be added to the S&P 500 Index on Wall Street from Wednesday following Chevron Corporation’s acquisition of Hess Corp.

Cromwell Property Group rallied 8.2 per cent to 39.5¢ after Brookfield signed a binding sale and purchase agreement to acquire the remainder of ESR’s 19.9 per cent stake in the listed group.