Is the equity boom entering a bubble phase?
There’s some early evidence the equity boom is entering a bubble phase.
Bubbles can last and keep inflating for a long time. Missing out can be costly, but predicting the exact moment of a bubble’s demise is a waste of time. So, the right strategy isn’t prediction but rebalancing and a little tactical asset allocation. That way, you can remain invested and still outperform, if only relatively, even if markets pull back.
This article was first published in The Australian on 05 August 2025.
The S&P 500 has hit its eighth record high of the year, driven primarily by the dominance of mega-cap technology and artificial intelligence-related companies. The rally has been supported by cooling inflation, which hasn’t undermined corporate profitability (yet), alongside positive earnings surprises and optimistic corporate guidance.
Meanwhile, declining market volatility, evidenced by the VIX dropping below 15, and a surge in speculative activity such as record trading in short-dated options, a doubling of penny stock volumes and the return of ‘meme’ stocks reflect a bullish backdrop, if not a bubble.
The longer the bubble expands, the greater the risk of a destabilising setback.
The S&P 500’s ascent has been propelled by a concentrated group of technology giants, which account for nearly half of the index’s earnings growth in 2025. Companies like Nvidia, now valued above $US4 trillion, have become emblematic of this rally. Unlike the dot-com bubble, where Cisco traded at 200 times forward earnings, Nvidia’s multiple remains below 40, underpinned by tangible earnings and cash flow.
While that distinction provides a degree of reassurance, the market’s heavy reliance on a narrow cohort of tech firms introduces structural vulnerability. A stumble in this sector whether due to earnings misses, regulatory scrutiny, or even just the unpredictable shifts in investor sentiment could trigger significant market-wide turbulence.
For now, the macroeconomic and thematic backgrounds support this rally. However, the absence of a one per cent daily market move in the past 25-odd trading days suggests an unjustified calm, particularly as the historically volatile August-to-October period approaches.
Valuations across the market are notably stretched. The S&P 500 trades at just more than 22 times forward earnings, compared to a historical average of 18, with an earnings yield of 4.5 per cent. It’s near its lowest level relative to long-term real yields since the early 2000s tech bubble. While valuations alone are not a reliable timing indicator, they reflect optimistic investor assumptions and expectations, and potentially, overconfidence.
Booms become bubbles, not when there’s evidence of idiocy but when prices disengage, more than subtly, from underlying fundamentals. Think CBA’s 30 per cent price increase in the past year, even though earnings will grow less than six per cent and the shares were already expensive a year ago.
According to Bespoke Investment Group, of the 33 stocks in the Russell 3000 that tripled in value since the market’s April 2025 low, only six were profitable in the prior year. Companies such as nLight, Aeva Tech, and Ouster — unprofitable yet up over 200 per cent — exemplify this trend, significantly outpacing stocks with lower price-to-earnings ratios, which gained a more modest 16 per cent on average.
Meanwhile, assets in leveraged exchange-traded funds, which carry elevated risk, have surged to a record $US135bn. And perhaps in an echo of the SPAC boom during the Covid-19 pandemic, today, there are over 60 publicly traded companies accumulating bitcoin, transforming their shares into leveraged cryptocurrency bets.
And they’re not the only extravagant anecdotal indicators of a bubble forming. High-profile events, such as Jeff Bezos’s €50 million wedding and the €8.6 million sale of a Hermes Birkin handbag, signal a spend-happy, couldn’t care less, mood among the affluent.
To my way of thinking, market sentiment appears increasingly detached from fundamental risks. Earlier this year, tariffs were a significant concern, contributing to market unease and causing the nearly 20 per cent peak-to-trough sell-off in April.
Today’s acceptance of an estimated 15 per cent average US tariff doesn’t sit well, proves that everything takes a long time to be factored in, and reflects a degree of “news immunity” reminiscent of the dot-com era’s “the internet changes everything” mantra.
As we enter the seasonally volatile August-to-October period, potential headwinds include U.S. inflation returning, a tariff-inspired slowing in global trade and growth, and rising geopolitical tensions, and a perceived belligerently hawkish Federal.
Despite these concerns, some analysts argue that the market’s fundamentals are more robust than in prior speculative periods, pointing to record corporate share buybacks that enhance earnings per share and make valuations more defensible. And unlike the dot-com era, leading technology firms today generate substantial earnings and cash flow, providing a stronger foundation for their stock prices.
And what if we are witnessing a low point in inflation? What if the fact the U.S. dollar index fell and long bond rates rose the last time the S&P500 declined nearly 20 per cent, reflects a serious and persistent undercurrent of concern about the untenability of the U.S.’s interest bill? Finally, what if my concerns about a $US70 trillion round of global debt refinancing in 2026, with average coupons jumping from 0.25 per cent to four per cent, begin to permeate the market narrative?
To navigate this landscape, investors could consider trimming profits in technology-heavy portfolios and reallocate to sectors and asset classes that offer relative or absolute stability during periods of volatility. Focus on quality and prioritise companies with strong earnings growth, cash flow, and, importantly, reasonable valuations. Maintain liquidity and consider investments with returns uncorrelated to public markets. Where possible, reduce exposure to unprofitable companies that have delivered near-vertical price increases.
This article was first published in The Australian on 05 August 2025.
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.
