Rudi’s View: All Eyes On Corporate Results

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This story features PRO MEDICUS LIMITED, and other companies.
For more info SHARE ANALYSIS: PME
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

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.

Goes without saying, the absence of September weakness for US markets serves as yet more evidence to doom and gloomers that equities truly are in a bubble, but any tangible ‘evidence’ for such predictions remains limited to what appears biased interpreting of facts and indicators.

Once we convince ourselves there’s an irrational, euphoric bubble forming, it’s not too difficult to find more evidence to underpin this assessment, but that doesn’t make it an accurate analysis.

Citi’s Bear Market Checklist is showing no more than 8 out of 18 signals are currently flashing red or orange, which is nowhere near the 17.5 recorded prior to 2000 or the 13 in October 2007.

Back in late 2021, before the Federal Reserve had to pivot into tightening policy, along with global bond yields jumping higher, depressing valuations of growth stocks, Citi’s Bear Market Checklist had nine items flashing red or orange for the US.

Hence, it is possible today’s markets could be in for a rough ride in 2026, but that’s seldom a matter of valuation.

Something fundamentally will need to change.

Australia, the laggard

The Australian share market did not follow its offshore peers towards higher highs in September with many of the local stalwarts suffering funds outflows in favour of commodities and smaller caps.

Whether this will be of any significance if/when US equities finally stumble, or worse, remains to be seen.

But at least one local indicator –Macquarie’s FOMO Meter– is signalling the September pause has taken the sting out of local market sentiment which is no longer measuring as excessively exuberant.

Similarly, and in contradiction to Citi’s Euphoria reading and other technical signals, Macquaries FOMO Meter for US equities is equally suggesting market sentiment is positive, but maybe not yet too positive.

Momentum remains narrow

What is too often ignored in market analyses and assessments is US market concentration and dominance in investor portfolios can be justified on the basis of achieved earnings and cash flows.

Understandably, institutional investors do not want simply to be buying the same stocks year in, year out and many have been wishing for a broadening of the bull market.

A recent clients’ tour by analysts at RBC Capital signalled many are frustrated as US market momentum continues to revert to the same megatrend and mega-growth companies.

Indeed, after a brief revival for value over growth and for small caps generally, recent momentum in the US is back with ‘old leadership’.

A broadening in this bull market away from the usual suspects has been anticipated on multiple occasions over the past number of years, but when exactly will this happen in a sustainable manner?

On some forecasts, more time is required for Fed rate cuts to come through and stimulate the US economy, which would improve the outlook for smaller cap companies and thus broaden their appeal.

Most economic projections that have entered the FNArena inbox this past number of weeks are signalling economic weakness ahead for the US, before momentum is projected to pick up throughout 2026.

Up until such reversal in momentum, investors might have to deal with the fact that strong earnings growth is still the privilege of the minority and, yes, AI features prominently among those.

Quarterlies and AGMs

Maybe the upcoming quarterly reporting season in the US can provide us all with some answers about earnings momentum, capex commitments, AI developments and –equally important– the general mood among investors.

One crucial factor underlying this year’s strong uptrend for US equities has been the fact that earnings growth thus far has steadfastly surprised to the upside (not in Australia, though).

We know the potential scenario in case of an underwhelming result and/or guidance, but what if –as some forecasters are suggesting– US quarterly earnings will yet again surprise positively?

In Australia, post-August results to date have been mostly uninspiring, see https://fnarena.com/index.php/reporting_season/

The RBA is equally less likely to cut as much and as quickly as the Federal Reserve.

It’ll be a while yet before investors can assess financial results from three of the major banks locally, as well as from local growth companies such as Aristocrat Leisure ((ALL)), TechnologyOne ((TNE)) and Xero ((XRO)), hence the all-importance of US quarterlies in the short term.

This week also sees local AGM season taking off with the likes of Redox ((RDX)), REA Group ((REA)) and Perenti ((PRN)) among the first.

Those market updates too might prove crucial for market sentiment generally over the weeks ahead, including TechOne’s first AI-driven product announcement on Thursday.

Markets are reflecting optimism

As far as macro factors are concerned, current elevated levels for US indices seems to suggest investors expect no negative impact from US import tariffs, which might prove too optimistic.

Consensus forecasts also seem to suggest there’s more margin expansion on the horizon, no doubt partially based on expectations of AI-driven efficiencies.

But a lower USD, bond markets behaving and nothing untoward from the White House, on top of Fed rate cuts and better economic conditions in 2026, are all crucial factors for these forecasts to be achieved.

What about AI being in a bubble waiting to burst?

History suggests new technological innovations, be they steam engines, rail roads, electricity or the internet, ultimately stumble on too high expectations fuelled by too many investments on too rosy projections.

I have yet to see any evidence this principle already applies to AI in 2025.

See also last week’s https://fnarena.com/index.php/2025/10/01/rudis-view-ai-boom-reveals-our-inner-bias/

Maybe upcoming results releases by Microsoft, Nvidia and others can counter some of investors’ concerns?

Review All-Weather Model Portfolio

The financial year ending on June 30th 2025 featured the return of Donald Trump in the White House and of extreme market volatility.

The second half of the year also saw doubt creeping into general sentiment towards AI and demand for data centres.

All in all, a gain of 13.85% (pre-fees) for the twelve months is not something to be unhappy about, right?

FY25 review of the All-Weather Model Portfolio: https://www.fnarena.com/index.php/download-article/?n=4B38C0EF-A173-8CE6-736A7AFC7B19FC49

Model Portfolios, Best Buys & Conviction Calls

This section appears from now on every Thursday morning in a separate update on the website. See Rudi’s Views for the archive going back to 2006 (not a typo).

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A subscription to FNArena (6 or 12 months) comes with an archive of Special Reports (21 since 2006); examples below.

(This story was written on Monday, 6th October 2025. It was published on the day in the form of an email to paying subscribers, and again on Wednesday as a story on the website).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena’s see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: contact us via the direct messaging system on the website).

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