December 21, 2025 • 6 mins
2025 has been an eventful year, with some strong returns - but what comes next? Sean Aylmer is joined by Roger Montgomery from Montgomery Investment Management to break down the forces that shaped markets this year. Looking ahead to 2026, Roger explains why investors should expect lower returns and higher volatility, how stretched valuations could limit future gains, and why rebalancing portfolios now may make sense.
For more information, visit montinvest.com or call 02 8046 5000.
Follow Roger’s insights at www.rogermontgomery.com
This is Fear & Greed's summer series - all-new short episodes every day, with regular news back from January 12. This episode is brought to you by Montgomery Investment Management. All information is general in nature. If you want to invest, we recommend you visit a financial advisor who can tailor investments to your needs.
Find out more: https://fearandgreed.com.au/
See omnystudio.com/listener for privacy information.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:04):
Welcome to the Fear and Greece Summer series, brought to
you by Montgomery Investment Management. I'm Sean Aylmer. Wrapping up
twenty twenty five. What to watch out for in twenty
twenty six. Best man for the job, Roger Montgomery, Founder
and Chief Investment Officer of Montgomery Investment Management. Roger, Welcome
back to Fear and Greed.
Speaker 2 (00:20):
Always a pleasure to see, Sean.
Speaker 1 (00:21):
So twenty twenty five, Yeah, what a year.
Speaker 3 (00:24):
Okay, Well, it was another year that we did think
would be good for the stock market. So since twenty
twenty two, what we've pointed to are three things that
would drive the stock market, and it's all that matters
for investors to consider. Number One, liquidity, central bank liquidity.
Are the banks injecting money into the system or are
they pulling money out? And they injected trillions and trillions
(00:45):
of dollars into the system, which found its way into
banks to lend and also then into the main street
as well. So that's number one. Number two since the
nineteen seventies, if you've seen this is two and three.
By the way, you've seen this combination innovative stocks with
pricing power have always done well. And the combination is
this disinflation. So that is not deflation, its.
Speaker 1 (01:10):
Consumer prices going down inflation.
Speaker 2 (01:11):
It's falling levels of inflation. That's right.
Speaker 3 (01:13):
You see consecutive prints of lower inflation numbers. So if
last year was six percent, this year is four percent,
next to three percent and so on. That combined with
positive economic growth, even if it's anemic. So even if
it's just point zero one percent growth economic growth GDP growth,
that's enough. And if you get the combination of those
three things, what you generally find is innovative companies do well.
(01:36):
And what's done well since twenty twenty two innovative companies AI,
you know the Magnificent seven. That's what's done well, and
that continued in twenty twenty five. Now, when you get
lots of liquidity in markets, people find things to bet on,
and the theme was AI, let's bet on this. So
there was this coalescing of a new thematic and new
(01:59):
we ex general purpose technology with ample liquidity, and hey,
there's no danger from inflation. We had disinflation, there's no
danger of a recession, we had positive economic growth. Let's
go in all in on these AI stocks, and up
they went and that continued into twenty twenty five. That
explains twenty twenty.
Speaker 1 (02:17):
Five, Okay, hard a question, Yeah, twenty twenty six.
Speaker 2 (02:21):
Okay, it is going.
Speaker 3 (02:23):
Yeah, it is harder because we've got challenges to liquidity,
so we've got challenges to disinflation. We you know, we're
just hearing stories at the moment about the Reserve Bank
of Australia maybe leading the world in raising rates because
inflation has surprised on the upside. And we've got concerns
about economic growth. Now you've seen in the United States
(02:45):
the jobs reports, unemployment is actually going up, ticking up,
and the employment sector and the consumer sector over there
very very weak, and so you know, there's questions about
all of.
Speaker 2 (02:56):
The three.
Speaker 3 (02:58):
Concerns, all of the three factors that normally drive markets
and generate great returns. And then on top of all
of that, we've got the potential unwinding of the AI boom,
and it's following the path of all previous general purpose
technology booms. So I think what we're going to see
next year are lower returns and more volatility, and that
(03:20):
volatility will come from that unwinding of the AI boom,
and also the fact that we've got a Republican in
the White House, and during presidential terms where Republicans are
in charge, we tend to get more volatility anyway, and
that's going all the way back to nineteen hundred and
so that's why I think we'll see more volatility. But
(03:41):
most importantly, what investors need to realize is that where
the S and P five hundreds PE is today the
price to earnings multiple for the big index the biggest
five hundred companies in the US. Based on where it
is right now, it's expected that the average annual return
two investors for investing in the S and P five
(04:04):
hundred over the next ten years, the average annual return
will be somewhere between plus four percent and minus four
percent per annum. So remember the rule in investing, the
higher the price you pay.
Speaker 2 (04:17):
The lower your return.
Speaker 3 (04:19):
If you've got prices very high pes are very high,
then you're going to get a lower return. So, based
on history, the next ten years is likely if you
buy today, it's likely to give you a single digit
return at best. Given that, it's probably worth thinking about rebalancing.
Speaker 1 (04:36):
Okay, what abd ees training market though, because it hasn't
gone as hard.
Speaker 3 (04:40):
No, that's right, but there's a reason for that. There's
less growth in Australian large caps, and that's because most
of the profits are paid out as a dividend because
we have franking, and franking credits have no value to
a company, enormous value to retirees, and so companies are
incentivized to pay most of the profits out as a dividend,
retaining less for growth. So if you look at the
(05:02):
retention rate or the dividend payout ratio of Australian companies,
it's about eighty or about eighty percent. You look in
the United States and it's half that, and so they've
got they retain a lot more capital for growth, and
consequently their companies are growing much faster.
Speaker 1 (05:18):
So back to the rebalancing. So going into twenty twenty six,
rebalancing towards what I think you should.
Speaker 3 (05:24):
Be rebalancing every year anyway. So what you do is
you're taking your profits out of some of the profits
out of the stock marke. You're not exiting the stock market.
That's an immature piece of advice.
Speaker 2 (05:35):
What you do is you.
Speaker 3 (05:36):
Say, you know, what I've done really well in the
stock market last year and the year before and the
year before that, I'm going to take some profits and
I'm going to invest in some uncorrelated asset classes. Now
at the moment, I'm advocating two things. Private credit sensibly
chosen private credit, you know, double A rated private credit
or triple B rate investment grade private credit. And for
wholesale investors, we like the idea of trash funds that
(06:01):
are successful, hard to get into, but have produced a
return profile that is very different to the stock market.
Speaker 1 (06:08):
Fantastic Roger, thank you for talking to Fear and Greed
summer series.
Speaker 2 (06:11):
Shan great to be with you, and Merry Christmas to everyone.
Speaker 1 (06:13):
Merry Christmas to you, Roger. That was Roger Montgomery from
Montgomery Investment Management. To learn more, visit montinvest dot com.
M O N T I N V E s T
montinvest dot com and you can sign up for Roger's
insights at Roger Montgomery dot com. That's R O G E. R.
Montgomery Roger Montgomery dot com. Fear and Greed is not
a financial advice podcast, and if you want to invest,
(06:34):
we recommend you visit a financial advisor who can tailor
investments to your needs. Don't forget to hit following the
podcast I'm Sean Elmer, and this is fear and greed,
brought to you by Montgomery Investment Management Team.
Welcome to the Fear and Greece Summer series, brought to
you by Montgomery Investment Management. I'm Sean Aylmer. Wrapping up
twenty twenty five. What to watch out for in twenty
twenty six. Best man for the job, Roger Montgomery, Founder
and Chief Investment Officer of Montgomery Investment Management. Roger, Welcome
back to Fear and Greed.
Speaker 2 (00:20):
Always a pleasure to see, Sean.
Speaker 1 (00:21):
So twenty twenty five, Yeah, what a year.
Speaker 3 (00:24):
Okay, Well, it was another year that we did think
would be good for the stock market. So since twenty
twenty two, what we've pointed to are three things that
would drive the stock market, and it's all that matters
for investors to consider. Number One, liquidity, central bank liquidity.
Are the banks injecting money into the system or are
they pulling money out? And they injected trillions and trillions
(00:45):
of dollars into the system, which found its way into
banks to lend and also then into the main street
as well. So that's number one. Number two since the
nineteen seventies, if you've seen this is two and three.
By the way, you've seen this combination innovative stocks with
pricing power have always done well. And the combination is
this disinflation. So that is not deflation, its.
Speaker 1 (01:10):
Consumer prices going down inflation.
Speaker 2 (01:11):
It's falling levels of inflation. That's right.
Speaker 3 (01:13):
You see consecutive prints of lower inflation numbers. So if
last year was six percent, this year is four percent,
next to three percent and so on. That combined with
positive economic growth, even if it's anemic. So even if
it's just point zero one percent growth economic growth GDP growth,
that's enough. And if you get the combination of those
three things, what you generally find is innovative companies do well.
(01:36):
And what's done well since twenty twenty two innovative companies AI,
you know the Magnificent seven. That's what's done well, and
that continued in twenty twenty five. Now, when you get
lots of liquidity in markets, people find things to bet on,
and the theme was AI, let's bet on this. So
there was this coalescing of a new thematic and new
(01:59):
we ex general purpose technology with ample liquidity, and hey,
there's no danger from inflation. We had disinflation, there's no
danger of a recession, we had positive economic growth. Let's
go in all in on these AI stocks, and up
they went and that continued into twenty twenty five. That
explains twenty twenty.
Speaker 1 (02:17):
Five, Okay, hard a question, Yeah, twenty twenty six.
Speaker 2 (02:21):
Okay, it is going.
Speaker 3 (02:23):
Yeah, it is harder because we've got challenges to liquidity,
so we've got challenges to disinflation. We you know, we're
just hearing stories at the moment about the Reserve Bank
of Australia maybe leading the world in raising rates because
inflation has surprised on the upside. And we've got concerns
about economic growth. Now you've seen in the United States
(02:45):
the jobs reports, unemployment is actually going up, ticking up,
and the employment sector and the consumer sector over there
very very weak, and so you know, there's questions about
all of.
Speaker 2 (02:56):
The three.
Speaker 3 (02:58):
Concerns, all of the three factors that normally drive markets
and generate great returns. And then on top of all
of that, we've got the potential unwinding of the AI boom,
and it's following the path of all previous general purpose
technology booms. So I think what we're going to see
next year are lower returns and more volatility, and that
(03:20):
volatility will come from that unwinding of the AI boom,
and also the fact that we've got a Republican in
the White House, and during presidential terms where Republicans are
in charge, we tend to get more volatility anyway, and
that's going all the way back to nineteen hundred and
so that's why I think we'll see more volatility. But
(03:41):
most importantly, what investors need to realize is that where
the S and P five hundreds PE is today the
price to earnings multiple for the big index the biggest
five hundred companies in the US. Based on where it
is right now, it's expected that the average annual return
two investors for investing in the S and P five
(04:04):
hundred over the next ten years, the average annual return
will be somewhere between plus four percent and minus four
percent per annum. So remember the rule in investing, the
higher the price you pay.
Speaker 2 (04:17):
The lower your return.
Speaker 3 (04:19):
If you've got prices very high pes are very high,
then you're going to get a lower return. So, based
on history, the next ten years is likely if you
buy today, it's likely to give you a single digit
return at best. Given that, it's probably worth thinking about rebalancing.
Speaker 1 (04:36):
Okay, what abd ees training market though, because it hasn't
gone as hard.
Speaker 3 (04:40):
No, that's right, but there's a reason for that. There's
less growth in Australian large caps, and that's because most
of the profits are paid out as a dividend because
we have franking, and franking credits have no value to
a company, enormous value to retirees, and so companies are
incentivized to pay most of the profits out as a dividend,
retaining less for growth. So if you look at the
(05:02):
retention rate or the dividend payout ratio of Australian companies,
it's about eighty or about eighty percent. You look in
the United States and it's half that, and so they've
got they retain a lot more capital for growth, and
consequently their companies are growing much faster.
Speaker 1 (05:18):
So back to the rebalancing. So going into twenty twenty six,
rebalancing towards what I think you should.
Speaker 3 (05:24):
Be rebalancing every year anyway. So what you do is
you're taking your profits out of some of the profits
out of the stock marke. You're not exiting the stock market.
That's an immature piece of advice.
Speaker 2 (05:35):
What you do is you.
Speaker 3 (05:36):
Say, you know, what I've done really well in the
stock market last year and the year before and the
year before that, I'm going to take some profits and
I'm going to invest in some uncorrelated asset classes. Now
at the moment, I'm advocating two things. Private credit sensibly
chosen private credit, you know, double A rated private credit
or triple B rate investment grade private credit. And for
wholesale investors, we like the idea of trash funds that
(06:01):
are successful, hard to get into, but have produced a
return profile that is very different to the stock market.
Speaker 1 (06:08):
Fantastic Roger, thank you for talking to Fear and Greed
summer series.
Speaker 2 (06:11):
Shan great to be with you, and Merry Christmas to everyone.
Speaker 1 (06:13):
Merry Christmas to you, Roger. That was Roger Montgomery from
Montgomery Investment Management. To learn more, visit montinvest dot com.
M O N T I N V E s T
montinvest dot com and you can sign up for Roger's
insights at Roger Montgomery dot com. That's R O G E. R.
Montgomery Roger Montgomery dot com. Fear and Greed is not
a financial advice podcast, and if you want to invest,
(06:34):
we recommend you visit a financial advisor who can tailor
investments to your needs. Don't forget to hit following the
podcast I'm Sean Elmer, and this is fear and greed,
brought to you by Montgomery Investment Management Team.
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