Historic highs, hard truths – protecting your wealth in 2025
In this week’s video insight I take a closer look at record stock markets, what’s driving them to new highs, and what that might mean for investors. The S&P 500 is trading at historic levels on measures such as price-to-earnings and price-to-book ratios, with much of the enthusiasm powered by the artificial intelligence (AI) boom. Companies are spending billions on cloud, semiconductors and infrastructure, while revenues are still catching up. It’s an exciting period of innovation, but also one where history reminds us markets often price in future growth well before it materialises.
That’s why I believe it’s important to think carefully about portfolio positioning. High valuations can point to more modest returns and potential volatility ahead. By trimming back exposure to potentially overpriced equities and introducing alternatives that move independently of the share market (like private credit), investors – particularly those nearing or in retirement – can create more resilient portfolios.
Transcript:
Hi everyone, I’m Roger Montgomery from Montgomery Investment management and welcome back! Today, we’re examining record stock markets, what’s driving them to record highs, the risks of a pullback, and how you can protect yourself if it all comes undone.
The S&P 500 is trading at historic highs. Metrics like price-to-earnings, price-to-book, and market-cap-to-gross value-added – the latter being a price to revenue ratio for non-financial stocks in the U.S. – are in uncharted territory. According to John Hussman, and as this chart shows, U.S. nonfinancial market valuations now exceed both the 1929 and 2000 peaks.
Of course, high valuations don’t guarantee a crash, but they do signal low future returns.
As this next regression analysis chart shows, current valuations predict a negative 6 per cent annualised return for the S&P 500 over the next 12 years. That’s compellingly unattractive. Vanguard has also produced a forecast, using their Capital Markets Model, and has recently revealed a slightly more palatable, 3.3–5.3 per cent forecast return for equities over the next decade. For growth stocks, Vanguard reckons returns over the next decade will be no better than 1.9–3.9 per cent and volatility will be above 16 per cent. Is that enough? Would you be happy investing in high growth equities if you knew the best you could achieve, on average, over the next ten or twelve years is minus 6 to 3.9 per cent per year, and there could be years where the market falls by 16 per cent? Of what if you knew it might fall by as much as it has in prior episodes – by 20,30 or even 50 per cent?
The artificial intelligence (AI) boom is the big driver of all the returns to date. Investors are pouring money into tech giants, expecting massive growth. And those global AI players are spending that money with gay abandon. According to the Gartner Group and Deloitte, AI spending is expected to reach US$1.5 trillion in 2025, with US$500–650 billion allocated to infrastructure, including cloud and semiconductors. But there’s a catch: AI sales revenue was only US$4 billion in 2024, and clearly, it was dwarfed by investment costs. Sure, it’s expected to grow this year and next, but so is the infrastructure spending. Will stock market investors collectively patiently wait until all the investing is done, will they wait and see if a decent return on investment (ROI) can be produced? Investors are notoriously impatient.
It’s also worth remembering the way bubbles build. First, the best stocks are bought, then those that are left behind because they look relatively cheap…eventually, every stock is priced as if they will all win. But capitalism rarely if ever lets everyone win. Not every AI company can win, yet they’re all priced like champions.
Some argue markets won’t crash because passive investing and cash inflows keep pushing prices up. But superannuation flows in Australia, haven’t protected the stock market from crashes before. The weight of money argument is a flawed one. Bubbles form when expected returns keep rising with prices, instead of falling as prices go up. In 1929, economist Irving Fisher famously predicted a “permanently high plateau” just before a 90 per cent crash. Today’s optimism mirrors that era. A bubble bursts when investors realise high prices lock in low returns. If growth slows, someone will blink, and the dam wall will break.
I am not suggesting you should bet on a crash. What I am suggesting is don’t ignore the risk. In recent years, investors have earned stock market-like returns without the volatility. I know of a private credit fund that has been running for eight years, has returned 9.55 per cent per annum, has never had a negative month and has no stock market exposure. I know of another alternative fund, an arbitrage fund, whose investors have experienced one negative month in its 52 months, have enjoyed returns of more than 20 per cent per annum and again, have had no stock market exposure. Of course, it is vital to point out that past returns are not a reliable guide to future returns, and that warning is also true for the stock market! Recent returns are not a reliable guide to future returns.
Rebalancing your portfolio is key – trimming potentially overpriced equities to reduce exposure and considering uncorrelated alternatives is going to be essential, especially if you are retired or retiring and can ill afford another big market setback.
Well, that’s it for today! Markets are pricey, but there are methods and alternatives that could reinforce your portfolio and protect your lifestyle. I look forward to seeing you next week, and in the meantime, follow us on Facebook, X and at our blog, rogermontgomery.com, where we post up to twice a day.
For more information about rebalancing into a Private Credit fund without exposure to property development and with an eight-year track record of attractive returns and no negative months, visit our Private Credit webpage here or call David Buckland or Rhodri Taylor on (02) 8046 5000.
Disclaimer:
You should read the relevant Product Disclosure Statement (PDS) or Information Memorandum (IM) before deciding to acquire any investment products.
Past performance is not a reliable indicator of future performance. Returns are not guaranteed and so the value of an investment may rise or fall.
This information is provided by Montgomery Investment Management Pty Ltd (ACN 139 161 701 | AFSL 354564) (Montgomery) as authorised distributor of the Aura Core Income Fund (ARSN 658 462 652) (Fund). As authorised distributor, Montgomery is entitled to earn distribution fees paid by the investment manager and may be issued equity in the investment manager or entities associated with the investment manager.
The Aura Core Income Fund (ARSN 658 462 652)(Fund) is issued by One Managed Investment Funds Limited (ACN 117 400 987 | AFSL 297042) (OMIFL) as responsible entity for the Fund. Aura Credit Holdings Pty Ltd (ACN 656 261 200) (ACH) is the investment manager of the Fund and operates as a Corporate Authorised Representative (CAR 1297296) of Aura Capital Pty Ltd (ACN 143 700 887 | AFSL 366230).
You should obtain and carefully consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Aura Core Income Fund before making any decision about whether to acquire or continue to hold an interest in the Fund. Applications for units in the Fund can only be made through the online application form that accompanies the PDS. The PDS, TMD, continuous disclosure notices and relevant application form may be obtained from www.oneinvestment.com.au/auracoreincomefund or from Montgomery.
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Any financial product advice given is of a general nature only. The information has been provided without taking into account the investment objectives, financial situation or needs of any particular investor. Therefore, before acting on the information contained in this report you should seek professional advice and consider whether the information is appropriate in light of your objectives, financial situation and needs.
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Performance of the Digital Income Fund – Digital Asset Class since its inception on 1 May 2021. Net returns after fees and expenses as at 31 July 2025 and assumes reinvestment of distributions.
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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.
