Raymond Da Silva Rosa: Is this year’s share market surge just too good to be true?

Share markets around the world have done very well this year. Indeed, some believe too well.

UK newspaper The Telegraph claims that “The stock market is a bomb waiting to go off” and The New York Times reports “Warning: Our stock market is looking like a bubble” although the authors say “no one can be certain”.

Are they right?

Let’s discuss theory. The efficient market hypothesis is the nutty sounding statement that whatever the share price of a company is trading at today is the right price. It implies all is well with the share market, move along nicely, nothing to see here.

Full disclosure: I believe the EMH. And, yes, I’ve observed markets and read and thought about them a lot. It’s my job. However, prices being right today don’t mean they won’t fall (or rise) tomorrow, perhaps dramatically. Investments are risky.

The direction of prices is usually uncertain but sometimes prediction is easy. For example, in April 2020, it was obvious that the spot price of West Texas Intermediate crude oil would rise from minus US$37 (-$57) per barrel once the temporary imbalance between oil production and pandemic-related fall in demand was corrected.

Most times, the imbalance between supply and demand is harder to assess. Ten years ago, a headline in a Sydney newspaper screeched “Australia is in one of the worst housing bubbles we have ever seen”. Many “experts” made confident predictions of a house price crash but those who bought a house 10 years ago have done very well because housing supply hasn’t kept up with demand.

Let’s look at supply and demand in the US share market.

As has been widely reported, the US share market’s performance is driven in large by gains to the Magnificent Seven companies – Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Microsoft and Nvidia – that are positioned to profit massively from artificial intelligence.

It is a winner takes all situation and because the likely winners are so few, the supply is effectively constrained. Nonetheless, a few cards have to fall in favour of the Magnificent Seven for them to continue to justify their high valuation. If they don’t, their share prices will drop substantially. There is high risk.

A high-risk investment that offers the possibility of very high return but also the likelihood of a severe collapse in value is pretty much indistinguishable from a bubble. It’s a matter of taste as to what one wishes to label such investments, but they are features of dynamic economies.

So much for supply. What is driving demand for shares?

One consequence of increasing wealth inequality is that rich people have growing piles of surplus money looking for a home. This high demand for investments is why the US stock market recovered its losses and rose to further heights after US President Donald Trump’s first round of tariffs in April.

Note however that although the US stock market has reached record highs in 2025, it doesn’t even rank in the top 50 of best-performing national share markets this year.

Trump’s tariffs have increased the relative popularity of other markets, including the bond market. Remarkably, Microsoft bonds are so popular they have been issued at a lower interest than US Treasury bonds (a story for another time).

What does it all mean for the direction of share prices?

As ever, legendary US banker JP Morgan’s view when asked this question remains pertinent, “young man, I believe the market is going to fluctuate”.

And the advice of Nobel Prize winner Harry Markowitz also remains sound, “diversification is the only free lunch in investing”.

Investing across a range of asset classes is the best safeguard against both unbearable FOMO and crippling loss.

Winthrop Professor Raymond da Silva Rosa is an expert in finance at The University of Western Australia’s Business School