Rudi's View | 10:00 AM
The current public debate in and around global financial markets intertwines two key points of discussion that are not by default each other's twins or equals.
By Rudi Filapek-Vandyck, Editor
On one side is the observation that equities are pricing in a lot of good news, which always carries the risk for disappointment.
On the other side are growing concerns that many hundreds of billions of investments in AI and AI infrastructure are setting the stage for the next 'bubble' to burst.
While many a public warning does not differentiate between the two, there are valid reasons to do so, if only because respective outcomes might not be as straightforward as suggested.
What if the answer to the question whether equities are presently overvalued is 'yes', but the AI megatrend as investment theme continues to charge ahead (after initially correcting lower in line with the broader market)?
In case anyone finds this a rather preposterous proposition given the many doubts and questions raised by megatrend critics, investors are reminded the US economy is showing plenty of signals pointing towards slowing momentum and a deteriorating outlook for jobs.
Were large institutions to adopt a more defensive portfolio positioning, depending on how long and how deep concerns about economic momentum would stretch, it is not inconceivable funds looking for relative safe havens would flow back into the same megacaps and AI beneficiaries that have dominated US markets for the past 2.5 years.
And yes, that would really fire up those voices warning about irrational bubbles already.
When valuations are high
Virtually nobody disputes the fact equity markets globally, including in Australia, look 'expensive'.
Whether this justifies the many warnings about a bubble waiting to burst is a different matter.
Many of such warnings seem based on generalised, face value calculations of today's markets in comparison with precedents from the past.
One easy to make counter-argument is that indices change. In Australia, the ASX200 has changed rather dramatically in recent years.
Consider, for example, both Pro Medicus ((PME)) and TechnologyOne ((TNE)) are now included in the ASX50 with PE multiples well-above average, joining the likes of Cochlear ((COH)), ResMed ((RMD)), WiseTech Global ((WTC)) and Xero ((XRO)).
Plus let's not forget today's local market heavyweight, CommBank ((CBA)), good for circa 12% of the major index, is trading on a forward-looking (FY26) multiple of 26.7x - this would have been considered inconceivable only a few years ago.
If we just stick to those two factors, it should be beyond discussion we can no longer simply rely on generalised calculations to truthfully assess where market valuations sit in 2025, in particular vis a vis the past.
The chart below was last updated in September, post the August results season, and nothing much has changed since for the main index components outside of resources.
Two main conclusions stand out from it:
-valuations, on average, have noticeably lifted post 2016
-valuations are currently high, but not at levels we haven't seen before post 2019
So, yes, nothing here suggests markets are 'cheap' or 'undervalued' but maybe warnings about bubbles bursting and deep sell-offs forthcoming look just a little over the top?
America leads
The situation in the US, still leading the rest of the world including on AI, is different from Australia.
Valuations are higher and so is the representation of AI. There's arguably a lot more speculative momentum trading going on over there too.
US equities have enjoyed 114 sessions without a -5% pullback, which is on par with that multiple for CommBank shares; a rather rare occurrence.
Citi's proprietary Panic/Euphoria index (renamed Levkovich Index after the death of its former strategist who devised this market indicator) sits well into Euphoria territory, indicating overall sentiment is simply too bullish, at least for the time being.
This is nothing out of the ordinary and nothing other technical indicators haven't equally been flashing for a while now.
It is but one key reason as to why so many have been anticipating a pause in the uptrend, or a pull back, even a correction, but so far US market momentum has refused to play to that script.
September is normally almost a guarantee for a pickup in volatility and market vulnerabilities, but not so in 2025.
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