Key Points
- High valuations, AI bubble concerns and uncertainty about interest rate cuts are creating short-term volatility.
- Despite this, company profits remain strong and there are no signs of recession, which continues to support markets.
- For long-term investors, timing markets is very challenging and can be costly. Having an appropriate long-term investment strategy and patience should reward investors.
What’s Happening?
Share markets have pulled back in November, with US and Australian shares down from their recent highs. Concerns about rising valuations, rapid AI-driven gains and shifting expectations for interest rate cuts have contributed to recent weakness.
Below is a simple look at what’s pressuring markets – and what’s helping hold them up.
What’s Putting Pressure on Markets?
High Valuations
Share prices – especially in the US – are trading at levels well above long-term averages. This doesn’t predict a downturn on its own, but it does mean:
- future returns may be lower
- markets have less protection if conditions worsen
Strong Gains Already Behind Us
After several strong years of performance, a period of cooling is not unusual. Historically, markets often take a breather after long stretches of above-average returns.
AI Enthusiasm May Be Overdone
A small group of major US tech companies has driven a large portion of market gains. Their rapid rise is raising questions about whether some parts of the market are running too hot.
Uncertain Interest Rate Outlook
Expectations for interest rate cuts in both Australia and the US have been pushed back. Fewer near-term cuts can mean higher bond yields, which typically weigh on share prices.
Broader Policy & Geopolitical Risks
Uncertainty around US tariffs, high global government debt, and ongoing geopolitical tensions continue to add to volatility.
What’s Supporting Markets?
Corporate Profits Are Strong
Company earnings – particularly in the US – remain solid. Importantly, today’s major tech names are generating real profits, unlike during the 1990s tech bubble.
No Recession Signals
Global business conditions still point to economic expansion. Share markets historically experience their deepest downturns during recessions, and no such indicators have emerged.
Tariff Pressures Easing
Recent political shifts have prompted the US to begin rolling back some tariffs aimed at cost-of-living pressures. This removes a key market headwind.
Investor Sentiment Isn’t Excessive
Despite the discussion around bubbles, investor behaviour isn’t showing the extreme optimism typically seen before major market peaks.
Rate Cuts Likely – Just Later
While the timing has shifted, both the US Federal Reserve and the RBA are still expected to cut rates in 2025.
Seasonal Tailwinds
Historically, markets often perform well from November through to early in the new year – the traditional “Santa rally”.
What This Means for Investors
Short-term volatility is a normal part of investing. While markets may face further pullbacks, the combination of solid earnings, no recession signs and expected future rate cuts helps keep the longer-term outlook constructive.
For most investors, the biggest risk isn’t market movement – it’s trying to time it. Missing even a handful of strong market days can significantly reduce long-term returns.
The most effective approach is to:
- stay focused on long-term goals
- maintain a well-diversified portfolio
- avoid making decisions based on short-term noise
If you’d like support reviewing your investment strategy in light of current market conditions, we’re here to help.
You can read the full article here: Oliver’s Insights – Share market wobbles – what are the negatives and positives?
Dr. Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate in light of your particular objectives, financial situation and needs. For further information on anything that has been discussed in this article, please consider seeking qualified and professional advice.
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