A reflection on today’s market landscape
Stepping back from the tidal wave of Trump’s pronouncements, backtracks and absurdly weak understanding of basic arithmetic (“egg prices have fallen 400 per cent!”), today’s investing environment is one of the most dynamic in recent history, shaped by transformative technological advancements, the threat of war, dynamic and unpredictable economic policies, and evolving investor behaviours. From the disruptive potential of artificial intelligence (AI) to the resurgence of retail investing and the spectre of market bubbles, the current landscape demands a little reflection.
The AI industrial revolution: a game-changer
The rise of AI is arguably the most significant force reshaping the global economy. Many claim this AI boom looks exactly like the dot.com bubble. And when you realise a quarter of a trillion US dollars has been invested in the space in 2025 already, it’s hard to argue against the claim. But unlike previous technological advancements, AI’s impact is expected to be revolutionary, not evolutionary. According to American Venture Capitalist, Mary Meeker’s comprehensive 2025 AI trend report, AI companies are scaling at an unprecedented pace. For instance, the median time for top AI companies to reach US$5 billion in annualised revenue is 24 months, compared to 37 months for Software-As-A-Service (SaaS) companies. Companies like CoreWeave, which saw a 730 per cent revenue increase from 2022 to 2024, and Palantir, now boasting a US$302 billion market cap, exemplify this explosive growth.
AI’s transformative power extends beyond individual companies. It is reshaping entire industries, from legal workflows to customer service automation. The technology’s integration into everyday processes is becoming seamless, often unnoticed by users, yet its economic implications are profound. Major corporations – hyperscalers like Meta, Microsoft, Amazon, and Google – are pouring billions into AI infrastructure, even as their free cash flow margins decline. The market’s willingness to tolerate this spending suggests a belief in AI’s long-term potential, but it also raises questions about sustainability.
One AI bull contends, “The U.S. stock market has a Historical Average [price-to-earnings of] P/E: ~20.5 (modern era). Today we’re looking at valuations [of] ~24.34 (estimated). We appear to be in an AI bull market. The reality is demand for AI chips and data centre expansionism and National Defense spending with geopolitical uncertainty could extend this bull market for years to come, giving Generative AI ample time to actually back up its swanky visions of AI Supremacy pitch decks and Venture Capitalist and Tech CEO proclamations.”
For investors, AI is a compelling opportunity. Notwithstanding the threat of war, a liquidity crunch and sustained higher interest rates, or a recession – all of which we have written about here previously – perhaps the simplest way to gain exposure is through broad indices like the S&P 500 or NASDAQ 100, where 35 per cent of constituents are direct AI beneficiaries.
It’s worth noting, however, that the rapid ascent of AI-driven companies, with valuations like Palantir’s 105 times price-to-sales ratio, does signal some speculative fervour. As we have noted many times before, history shows that transformative technologies often trigger bubbles, and AI is likely no exception.
The inevitability of a bubble
The potential for an AI-driven market bubble is a recurring theme in 2025. Historical precedents – such as the dot-com boom – demonstrate that course-of-history-altering technologies often lead to periods of overvaluation. The current market environment, characterised by high valuations and intense investor enthusiasm, bears hallmarks of such a bubble. CoreWeave’s US$82 billion market cap and Palantir’s meteoric rise are cases in point. While these companies may deliver on their promise, the gap between current valuations and fundamentals suggests that speculative excess is building.
Bubbles aren’t limited to AI. The broader market, particularly the Magnificent 7 (Apple, Microsoft, Amazon, Alphabet, meta, Nvidia, and Tesla), has driven significant outperformance, with retail investors reducing their exposure to these stocks after buying heavily during dips in 2022 and 2025. This shift in retail behaviour – moving away from the Magnificent 7 toward the “next tier” of AI-related stocks like Palantir – indicates a search for the next big winner, further fuelling speculative momentum.
The risk of a bubble is compounded by the rapid pace of market movements. Modern markets process information faster than ever, leading to quicker corrections and recoveries. Since 2020, bear markets have been shorter and less severe, with the 2022 drawdown in the Magnificent 7 (e.g., NVIDIA’s 63 per cent decline, Tesla’s 49 per cent) recovering rapidly. This acceleration, especially in the context of Trump’s presidency, suggests future downturns may be more frequent but less prolonged, though a severe financial or liquidity crisis could still disrupt this pattern in 2026/27.
Post-COVID trends
The post-COVID environment has fundamentally altered consumer behaviour. Spending patterns have shifted toward experiences, particularly travel, which younger demographics now view as a necessity rather than a luxury. Hotel operator, Marriott International’s CEO, Anthony Capuano, noted that, despite a 52-year low in consumer confidence, revenue per available room (RevPAR) grew over four per cent last quarter and three per cent in the U.S. and Canada, reflecting this shift. Credit card data confirms that this trend spans demographics, suggesting a multi-generational change in priorities.
However, in the U.S., cracks are indeed appearing among lower-income consumers. Surveys from Dollar General indicate that 25 per cent of customers have less income than last year, and 60 per cent anticipate sacrificing necessities. Meanwhile, American consumer credit reporting agency, TransUnion, reports an increase in part-time workers seeking more hours, hinting at a cooling labour market.
Of course, these pressures matter little amid the stock market’s focus on AI enablers and hyperscalers, which are less sensitive to lower-income consumer spending.
Global dynamics
Globally, economic uncertainties, particularly tariffs, loom large. The uncertainty around tariff implementation – how they will land and their impact on the global economy – is a wildcard. Surveys suggest that nearly half of service firms and 30 per cent of manufacturers plan to pass tariff costs to consumers, while 20 per cent may absorb them. The Federal Reserve’s response to potential inflation, will be critical. Some argue for pre-emptive cuts to stimulate activity in housing and mergers and acquisitions (M&A), which are at historic lows.
Europe is another focal point, with significant investments from companies like Netflix (US$1.1 billion in Spain between 2025 and 2028) and Blackstone (US$500 billion over the next decade, having already invested US$100 billion in the UK). Blackstone sees Europe as a “major opportunity” and has emphasised the continent’s growing investment potential in the context of changing international alignments.
Since October 2022, European markets have outperformed the U.S. by 30 percentage points, prompting calls for diversification away from U.S.-heavy portfolios.
Cryptocurrency, particularly Bitcoin, has also now entered the mainstream. Bitcoin ETFs, like BlackRock’s IBIT with over US$70 billion in assets, reflect institutional adoption. With Bitcoin at all-time highs, crypto is increasingly indistinguishable from traditional finance (TradFi), despite resistance from some traditionalists and purists.
Navigating the future
We regularly post blogs that contemplate the future because that’s where returns are made, and it would be remiss not to include a paragraph about the outlook here. The 2020s are shaping up as a defining decade, marked by AI’s transformative potential, a liquidity event in 2026/27 and geopolitical shifts. While opportunities abound, the risk of an AI-driven bubble shouldn’t be ignored (we aren’t there yet). It will be marked by speculative fervour and high valuations. Investors must balance exposure to high-growth sectors with diversification to mitigate risks.
Here at the blog, we have noted the diversifying and potentially stabilising benefits of investing in our private credit offerings.
Broad market indices offer a straightforward way to ride the AI wave, but vigilance is required as markets move faster than ever.
The interplay of tariffs, Federal Reserve policy, and demographic shifts will further shape the landscape. Over the last 100 years, the S&P 500 average annual return with dividends reinvested has been 10.46 per cent as of June. However, over the last five years, the annual return has been 16.43 per cent. Is this the beginning of a new period of much higher returns for investors, or do the higher recent returns indicate the emergence of an unsustainable boom? For now, the stock market’s resilience despite unprecedented challenges suggests that remaining invested is the preferred approach. However, investors need to keep an eye on emerging trends, and this blog! Meanwhile, keep in mind that as AI continues to reshape industries and economies, its integration into daily life will accelerate, bringing both opportunity and the inevitability of market excesses.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
