How to respond

Across my articles and media commentaries, I have emphasised that preparing for an artificial intelligence (AI) re-pricing is not about timing a top or shorting tech, but rather about protecting capital through discipline, factor balance, and liquidity.

There are five primary strategies to insulate an investment portfolio from an AI re-rating:

1. Diversify away from equity index heavyweights

Broad, passive equity indices (such as the S&P 500 or Nasdaq) are historically concentrated. Passive flows into index funds mean a significant portion of an investor’s exposure is tied to six or seven AI-driven mega-caps.

Rebalance away from broad index funds that leave up to 60 per cent of equity risk tied to the AI trade. Investors might also consider locking in recent gains and diversifying equity exposure across unsung, non-AI themes. Continue…

by Roger Montgomery Posted in Aura Group, Economics, Insightful Insights, Investing Education, Manufacturing, Market commentary, Market Valuation, Technology & Telecommunications.

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Last week, Google reported its first ever quarter of negative cash flow, surprising analysts who thought Q1 2027 would be when pressure on cash flows could seriously emerge, and causing the share price to plunge more than seven per cent.

With the clear exception of Tesla, most of the Mag 7 once deserved high earnings multiples because they were asset-light businesses with competitive advantages that didn’t require money to be defended. The artificial intelligence (AI) race has quickly eroded those moats and their characterisation as asset-light, because, over the last two years, they have had to spend hundreds of billions building data centres to remain competitive. Continue…

by Roger Montgomery Posted in Economics, Insightful Insights, Manufacturing, Market commentary, Market Valuation, Technology & Telecommunications.

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If you’ve been following the technology headlines, you might be confused by two seemingly contradictory statements. The first is that artificial intelligence (AI) is becoming dramatically cheaper to run, and the second is that tech companies are spending more money on AI compute than ever before.

How can we reconcile these statements, and what does the conclusion mean for companies like Pro Medicus (ASX: PME), Xero (ASX: XRO), NEXTDC (ASX: NXT), Megaport (ASX: MP1) and others?

If the unit price of AI is plummeting, shouldn’t the overall costs be going down? And if AI software is taking over the world, shouldn’t every startup building an AI application (App) be printing money?

To help explain the apparent dichotomy, you need to understand a 160-year-old economic concept called Jevons Paradox that’s currently being referenced everywhere and said to be driving the entire AI industry. Continue…

by Roger Montgomery Posted in Companies, Energy / Resources, Insightful Insights, Manufacturing, Market commentary, Market Valuation, Technology & Telecommunications.

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I joined Jess Maguire on ABC Statewide Drive to discuss how the rise of passive investing is changing the sharemarket, with index funds increasingly pushing money into the biggest companies regardless of valuation. Using SpaceX as an example, we explored how speculative companies can attract enormous valuations during periods of market optimism, and why that may not last forever. We also looked at what this means for Australians, many of whom may have exposure to these trends through their superannuation.

Tune in from 1:45:22 on ABC Statewide Drive Continue…

by Roger Montgomery Posted in Market commentary, Market Valuation, Radio.

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I joined Juliette Saly on Ausbiz to discuss how the rise of passive investing is reshaping markets. With ETFs and index funds now dominating trading, quality-focused active managers are struggling as money flows into the biggest index constituents regardless of valuation or fundamentals. While this trend may continue for some time, market cycles eventually turn, and when they do, companies with strong fundamentals, high-quality balance sheets and durable cash flows are likely to come back into favour.

Watch the episode here: The “profitless rally” Roger thinks could end badly Continue…

by Roger Montgomery Posted in Economics, Editor's Pick, Global markets, Insightful Insights, Investing Education, Market commentary, Market Valuation, TV Appearances.

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When I wrote Value.able in 2010, ‘Quality’ as an investing factor was gospel, a foundational truth: buying fundamentally superior businesses at reasonable prices and holding them over the long run was the surest path to wealth creation.

Individuals like Warren Buffett, Charlie Munger, Mohnish Pabrai, Seth Klarman, Howard Marks and Terry Smith proved, over decades, that Quality rules. Superior Return on Capital Employed (ROCE) or Return on Equity (ROE), high gross margins, and consistent Free Cash Flow (FCF) conversion inevitably compounded a company’s equity, and ultimately produced outsized returns for investors in those businesses. Continue…

by Roger Montgomery Posted in Economics, Editor's Pick, Insightful Insights, Investing Education, Market commentary, Market Valuation.

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In my latest article for The Australian, I argue that the S&P 500 is no longer the diversified benchmark many investors believe it to be. With an increasing share of the index now driven by the artificial intelligence (AI) theme, concentration risk is at extreme levels. History suggests these periods don’t last forever, making quality companies and genuine diversification worth a closer look.

Download the article here: AI boom turns S&P 500 into a dangerous bet

by Roger Montgomery Posted in Economics, Editor's Pick, Global markets, In the Press, Investing Education, Market commentary, Market Valuation.

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I joined Kylie Morris on ABC Newcastle Mornings to discuss the impact of Labor’s changes to negative gearing and capital gains tax (CGT) on the housing market. We looked at why first home buyers may be finding it harder to enter the market, the effect of tighter lending rules, and how changes to self-managed superannuation borrowing could affect housing supply.

We also touched on ASIC’s record civil penalties over the past financial year and why it’s important that companies engaging in misconduct are held accountable.

Tune in from 35:50 on ABC Newcastle Mornings Continue…

by Roger Montgomery Posted in Economics, Radio.

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