Market highs and warning signs – what should investors watch
In this week’s video insight, I explore the rally driving equity markets, led by technology stocks and the artificial intelligence (AI) boom – which are being fueled by a flood of central bank liquidity.
While company earnings have been strong and inflation is cooling, signs of excessive speculation are starting to emerge – from meme stock rallies to a surge in short-dated options and unprofitable companies tripling in value. With global risks rising and U.S. debt levels climbing, perhaps now could be a sensible time to reassess your portfolio and consider reallocating some gains into assets that have less public market risk.
Transcript:
Hello and welcome to this week’s video insight.
The equity markets posted extraordinary gains across 2023 and 2024, and now, past the first half of 2025, the S&P 500 has done it again, breaking new records thanks to mega-cap technology and artificial intelligence (AI) companies, which in turn are benefiting from trillions of dollars in liquidity that is being supplied to the financial system by global central banks. Yet, the question looms: are we witnessing a sustainable boom, an emerging bubble, or a signal for alarm?
The S&P 500’s ascent in 2025 reflects cooling inflation, robust corporate earnings, and optimistic guidance. Liquidity is also accelerating at an estimated pace of US$10 trillion annually – a tide that lifts all asset prices, especially equities. Meanwhile, about 70 per cent of S&P 500 companies have reported Q2 2025 earnings as of Tuesday evening. And in a word, their results have been robust.
Companies like Nvidia, with tangible earnings, double-digit growth, and a forward price-to-earnings (P/E) below 40, have been central to this rally. Microsoft’s recent earnings report exemplifies this strength: revenue reached US$76.4 billion, up 18 per cent year-over-year, surpassing estimates by US$2.6 billion. Its cloud division, Azure, grew 39 per cent, and Microsoft Cloud now accounts for 61 per cent of revenue, up four points from last year. Unlike the dot-com bubble of 1999, where pre-revenue startups dominated, today’s leaders are grounded in substantial profits. Unsurprisingly, Meta is up 28 per cent, Nvidia 30 per cent, MSFT 25 per cent, Anduril is up nearly 100 per cent, and military stocks are up 20-40 per cent.
Despite this strength, caution is warranted. Market volatility has been unusually subdued, and the tranquillity feels misaligned with significant uncertainties, including U.S. President Trump’s tariff reintroductions and the historically volatile August-October period approaching. Speculative exuberance is also evident: short-dated options trading is surging, penny stock volumes have doubled, and profitless meme stocks have spiked 80 per cent – sometimes over just one or two days. Unprofitable Russell 3000 stocks have tripled in value, leveraged ETF assets have climbed to US$135 billion, and some companies are pivoting to bitcoin, echoing past market frenzies.
Elsewhere, valuations are increasingly stretched. The S&P 500 trades at 22 times forward earnings, compared to a historical average of 18, with an earnings yield of 4.5 per cent – near a two-decade low relative to real yields. The U.S. fiscal situation adds further concern, with national debt approaching US$37 trillion. The cost of servicing this debt is ballooning as bonds issued at 0.25 per cent in 2009 or 2020 are reissued at 4.25 per cent – a 400-basis-point increase that strains the budget. The yield curve is also steepening, even as the Federal Reserve began cutting rates in September last year. The divergence from historical patterns suggests some unease about U.S. debt sustainability. Some commentators are suggesting it reflects Long-term U.S. Treasuries are losing their status as a safe-haven asset, with gold gaining favour.
In light of these risks, thinking strategically is essential. Diversification across markets and asset classes with less exposure to public equities is a prudent step. Consider rebalancing portfolios, for example, reallocating some of the gains from the highest-flying equities to more stable asset classes with less public market risk. This is not a call to abandon the market but a reminder to act thoughtfully amid the stretched valuations and emerging exuberance within a portfolio.
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Disclaimer:
The Polen Capital Global Growth Fund owns shares in Nvidia and Microsoft. This article was prepared 8 August 2025 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade any of these companies you should seek financial advice.
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.
