Climbing the ‘Wall of Worry’ – is the market rally built to last? « ROGER MONTGOMERY

Climbing the ‘Wall of Worry’ – is the market rally built to last?

This week I explored the growing warning signs lurking beneath the market’s strong performance. From ballooning U.S. fiscal deficits and overexposure to a handful of mega-cap tech stocks, to sky-high artificial intelligence (AI) valuations that echo the dot-com era – there are clear signals that caution is warranted.

While the current market resilience is impressive, now is the time to focus on quality stocks and diversifying your portfolio. Exploring alternative asset classes like private credit – which remains uncorrelated to public markets – could help investors navigate what comes next.

Transcript: 

Hi I’m Roger Montgomery and welcome back to this week’s video insight, where we cut through the market noise to bring you a little clarity. Today, we’re discussing a market that’s climbing a wall of worry like never before. Should you buckle up or step aside?

Let’s start with the big picture. By July 1st, the MSCI World Index was sitting pretty, surpassing its pre-Liberation Day peak of April 2nd. That’s right – global equities are rallying despite a geopolitical storm that would’ve sent markets into a tailspin in any other era. Think about it: U.S. tariffs projected to hit 15 per cent or higher, three simultaneous Middle Eastern conflicts, and direct U.S. military strikes on Iran’s nuclear facilities. Any one of these would’ve spiked oil prices, strengthened the dollar, and crushed equities in the past. Yet, here we are – markets are up. Why?

Well, globally, Investors are shrugging off short-term inflationary risks and focusing on the upside. Global earnings forecasts are climbing, with dividends projected to rise over 10 per cent this year. In the U.S., share buybacks are hitting record highs. And in Europe, despite the Ukraine conflict and Trump’s push for higher defence spending, the Euro’s stronger, and equities are rallying. Investors are betting on the positives – such as a moderate tariff regime reducing the U.S. trade deficit, now at nearly 5 per cent of Gross Domestic Product (GDP), and the muted economic fallout from the U.S. strikes on Iran. Oh, and get this: oil prices are down 20 per cent from last year, and the U.S. dollar? Down over 10 per cent in 2025.

Closer to home, Australia’s market is riding the same wave. The NAB’s June 2025 Business Survey revealed a surge in trading conditions, profitability, and employment. Business confidence is at its highest in over a year, with capacity utilisation and forward orders trending up. Even Macquarie Research, once cautious, is rethinking its approach to price-to-earnings (P/E) ratios, especially for banks. They’re saying this cycle’s different. I think I’ve heard that before! So, Is this rally too good to be true?

Let’s talk warning signs. In the U.S., fiscal deficits are ballooning, with Trump’s Big Beautiful Bill Act projected to add US$3 to US$3.4 trillion to the national debt over the next decade. Moody’s downgraded the U.S. credit rating in May, and that’s not all. Equity exposure among Commodity Trading Advisers is at the 89th percentile – meaning we’re seeing stock investments at levels higher than 89 per cent of historical periods. Retail investors are also piling in, with their trading share hitting 14 per cent, the highest since 2018. They have over US$1 trillion is parked in just three stocks – NVIDIA, Apple, and Tesla.

And then there’s the artificial intelligence (AI) bubble debate. The top 10 S&P 500 companies – many AI-driven like NVIDIA, Meta, Alphabet, and Microsoft – are trading at forward P/E ratios of 28 to 30 times, higher than the dot-com peak in 2000. The S&P 500’s overall P/E is 21 to 23 times, not as wild as the Nasdaq’s 90 times in 1999, but the concentration in AI megacaps is raising eyebrows. And then there’s Palantir – trading at a jaw-dropping 102 times sales and 423 times earnings.

Of course, the counter argument is today’s AI giants aren’t the unprofitable dot-com startups of 2000. NVIDIA alone generated $28.4 billion in cash flow in the first half of 2025. Alphabet and Microsoft have diversified revenue and dominant market positions. Plus, falling interest rates in 2025 are a tailwind for growth stocks, unlike the 7-8 per cent rates that choked liquidity in 2000. But don’t forget – Apple’s recent research shows advanced AI models accuracy collapses to zero on complex, real-world problems, raising questions about their long-term value.

So, what’s the solution? Well, this market’s resilience is impressive, but there are warning signs. Valuations are stretched, fiscal risks are mounting, and the AI hype might be outpacing reality. My take? Stick to quality, diversify across asset classes including private credit and don’t get swept up in the euphoria.

That’s all we have time for today. Continue to follow us on Facebook and X and if you found this valuable, hit the like button, subscribe, and share your thoughts in the comments.

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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.