December 17, 2025

 

(THE RBA MEETS IN FEBRUARY 2026 AND AUSSIES ARE VERY NERVOUS)

 

December 17, 2025

 

Hello everyone

 

The RBA could deliver a shock move for investors/mortgage holders in February 2026.  It’s now expected that a rate hike in Australia is well and truly on the table.

Commonwealth Bank and National Australia Bank have broken ranks with their peers, becoming the first of Australia’s big four banks to officially forecast that the central bank will lift rates in 2026. 

CBA sees a single 25 basis point hike in the cash rate target to 3.85 per cent.  NAB sees two hikes totaling 50 basis points in the first half, pushing the cash rate up to 4.1 per cent.

Inflation was supposed to be beaten.  Instead, it has shown disturbing signs of persistence.

RBA governor, Michelle Bullock, sees underlying inflation staying at 3.3 per cent or above for five consecutive quarters.

January 28 will deliver some insight on the economy, as this is when the December quarter inflation figures are released.

 

ARE WE IN AN AI BUBBLE?

No, Not Yet. That’s the short answer.  (And that’s an opinion shared by many analysts).

Let me elaborate a little and share some arguments illustrated by Michael Sheldon, senior portfolio manager at Washington Trust Wealth Management.

First, let’s unravel valuation.

High valuations were widely associated with the stock market during the late 1990’s.  For example, the P/E ratio of the largest tech-related companies of that time (Cisco, Intel, Nokia, and Microsoft) increased from around 20 in mid- 1995 to 70 by early 2000.

By way of comparison, the largest tech-related names in the market today (Meta, Apple, Amazon, Microsoft, etc) have largely traded in a range of 30-40 times earnings over the past several years.  On a 12-month forward basis, most of these companies are now trading with a P/E below 30, with some exceptions. Sheldon argues that while several of the largest technology companies today have above-trend market valuation levels, that is offset to some degree by strong balance sheets, high profitability ratios, and dominant industry positions.

 

Secondly, let’s look at technological developments.

The present day is very similar to the late 1990’s, where there was a focus on technological innovation.  In the late 1990’s it was the introduction and buildout of the internet and the promise of what that might deliver that drove investment.  Today, it’s the introduction and development of artificial intelligence.

In both situations, technological developments were forecast to create significant change for businesses, individuals, and society around the world.  The internet created what we call the “digital economy.”  It created new ways for people to communicate, generated whole new industries, and allowed people around the world to access the same information (which in many cases was previously not available).  Basically, it reshaped the world. 

Today, Sheldon notes that we are in the early stages of the development and buildout of artificial intelligence.  Once again, we are being introduced to a new technology that industry experts believe will change the world for individuals, businesses, and the world.  Billions of dollars have already been spent, and trillions of dollars are likely to be spent in the years ahead to support and grow this new technology.

The questions that harbour the most concern include:

Will there be enough cash flow to support the massive amount of AI capex taking place?

Will companies involved in the AI buildout ultimately be able to monetize all this spending?

Sheldon reminds us that in business, there will always be winners and losers.  In other words, it is important to spread the risk across dynamic growth companies within your portfolio.

 

The Fed and Rates

Today, Sheldon points out that rate cuts are providing a tailwind for the economy and financial markets, whereas during the late 1990’s, Fed policy acted as a headwind for economic growth and equity markets.

 

U.S. Corporate Health

Large U.S. technology companies appear to be in a healthier financial position and are more profitable today versus in the late 1990’s.

Compared with the 1990’s, Sheldon shows that the largest companies by market cap today have substantially higher net income margins (29% versus 16%), more cash on their balance sheets (2.7% versus 1.7%), less leverage(with a net debt-to-equity ratio of -22% versus -4%) and they generate a significantly higher return on equity (46% versus 28%), according to a recent Goldman Sachs report.

Capex spending has started to rise in recent quarters, but free cash flow has been strong. According to UBS, the largest tech companies, capex as a percent of operating cash flow has risen from around 40% in 2023 to 70% so far in 2025.

 

Conclusion

AI is a new technology that will transform economies and drive global markets over the next several years. Past transformative technologies included the railroads, radio, automobiles, and, more recently, in the late 1990s, the internet.  Industry experts forecast that trillions of dollars will be spent on AI over the next several years.

Valuations for the largest tech-related companies have increased due to investor enthusiasm, but are lower than their peak in the late 1990’s.

The balance sheets of the largest technology companies are stronger today versus three decades ago (based on a range of different financial ratios), and the Federal Reserve Bank is cutting rates (not raising rates) to help support economic growth.

Continued AI adoption and capex spending are likely to fuel further gains in the year ahead, although investors should be aware of potential bubble risk that may develop down the road.

 

How to offset risks

Active versus passive equity market exposure.

Diversification across different sectors of the market.

Hold some fixed income exposure.

Hold some cash for specific short-term needs.

 

SOMETHING TO THINK ABOUT

 

 

 

Cheers

Jacquie