Markets have had a shaky November. US shares are down 3.2%, and Australian shares have fallen 5% from their October highs. Investor concern about an AI-driven bubble has escalated, as valuations appear stretched. Uncertainty around central bank rate cuts has added to the volatility.
The negatives for shares…
Stretched Valuations
Valuations are high, particularly in the US where the forward P/E ratio is 23.5—close to tech boom levels. Australia's P/E ratio is even higher than its tech bubble peak. Meanwhile, equity risk premiums remain low, limiting the cushion against adverse surprises.
Why it matters: High valuations signal lower future return potential and reduce downside protection.
Strong Past Returns May Precede Weakness
Global markets have posted exceptional returns since 2022—US shares up 23% p.a., global shares 21%, and Australian shares 13%. Historically, periods of outsized returns often precede corrections or bear markets.
AI-Driven Bubble Risk
Enthusiasm for AI stocks, especially the “Magnificent Seven” (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, Tesla), has driven massive gains—30-fold over a decade—and now accounts for over half the US market’s gains since 2023.
Rate Cut Uncertainty
Expectations for U.S. and Australian rate cuts have diminished. Weakening US data and sticky Australian inflation raise concerns about the timing and extent of easing. Higher bond yields could further pressure valuations.
Policy and Debt Risks
Uncertainty persists around Trump’s tariffs and their economic impact. High public debt levels and geopolitical tensions remain key risks.
The positives…
Strong Profit Growth
US Q3 earnings season was robust: 82% of companies beat estimates, with profits up 15.5% y/y. Tech sector profits surged 28% y/y—unlike the profitless dot-com boom of the 1990s.
No Signs of Recession
Global PMIs suggest continued economic expansion. In Australia, improving growth should support earnings in 2025.
Trump Policy Pivot
To regain voter support, Trump is easing tariffs, particularly on food imports. This shift signals a move toward more market- and consumer-friendly policies, reducing trade-related economic headwinds.
Lack of Euphoria
Despite bubble concerns, investor sentiment is not euphoric—typically a sign that a market top is still ahead.
Easing Still Expected
Both the Fed and RBA are still expected to cut rates further in 2025, albeit not immediately. Forecasts allow for three Fed cuts and one RBA cut by mid-year.
Seasonal Tailwinds
Historically, November through January is a strong seasonal period for shares—the so-called “Santa Rally.”
Outlook and Strategy
So, while the risk of a further near-term pullback in shares is high, a more severe fall may not come till next year. And in the meantime, still strong global profit growth, little indication of a recession and the likelihood that central banks will still cut rates further suggest the broad trend in shares may still remain up. However, 2026 could be a rougher year as it’s another mid-term election year in the US. Since 1950 US shares have had an average top to bottom drawdown of 17% in mid-term election years.
The bottom line is that stretched share market valuations are warning of the risk of a further fall in share markets and it’s possible that AI enthusiasm has run ahead of itself. But stretched valuations are a poor timing tool for market movements. As we saw in the 1990s any bubble could inflate further, well beyond when commentators and experts start to worry about it. Either way, rough periods are an inevitable part of share market investing but trying to time them is hard, so the key is to adopt an appropriate long term investment strategy and stick to it.
Rick Maggi CFP, Financial Advisor Perth, Westmount Financial
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Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. It is important to note that past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs. Excerpts from this article were taken from Dr Shane Oliver (Head of Investment Strategy & Chief Economist, AMP) article of 18 Nov 2025.