Market Collapse is not inevitable, but investors need to know that risk exists

With equities continuing their relentless rally after another strong year, investors are increasingly asking how long it can continue. Valuations are undoubtedly high, but valuations are a poor guide to near-term market direction.

With hope increasing that AI can spur even productivity gains, it has become fashionable to draw parallels with the booming equity markets of the 1990s.

The similarities with the 1990s

Certainly, there are parallels. A new technology is spurring hopes of a fundamental change in how the economy operates. Back then it was the internet, this time it is AI. Hundreds of billions of dollars of investment have poured into chips, data centres and AI infrastructure supporting US GDP growth and materially boosting earnings for stocks like Nvidia.

Productivity is another element. In the 1990s greater use of personal computers powered Greenspan’s new paradigm economy. To date, the productivity gains from AI have been more anecdotal but strong US productivity numbers in Q3 have raised hopes of a more meaningful trend.

There are also similarities in market dynamics. Equities stumbled in 1994 as the Federal Reserve tightened policy, only to surge higher once rates were cut in 1995. More recently, the 2022 hiking cycle triggered a sharp correction before markets recovered as tightening ended. This is why optimists argue we may be closer to 1995 than 1999.

What is different this time

But this framing misses what matters most.

The late 1990s rally was underpinned by a unique macro backdrop. Growth was strong, productivity gains were broad-based, fiscal policy was disciplined and globalisation acted as a powerful disinflationary force.

That world no longer exists.

While growth today has been resilient, it is nowhere near the 4 per cent-plus rates seen in the 1990s. More importantly, much of the expansion has been driven by large and persistent fiscal deficits. Public debt has doubled as a share of GDP since 2000, leaving far less room for policy manoeuvre in the next downturn.

What’s more, the US economy is increasingly imbalanced and levered to the performance of the stock market. US households own roughly $40 trillion of equities, but those holdings are heavily concentrated among the wealthiest. Rising markets have created a powerful wealth effect that has supported demand even as lower-income households struggle with the affordability crisis.

The coincidence of high debt at a time of high asset valuations creates an inherent vulnerability for the economy.  If ultimately the AI spend weakens and equities turn down, the impact on consumer demand and economic growth could be materially greater in this cycle in the past. The wealth effect would go into reverse. And with debt levels elevated, the fiscal space to respond credibly, without generating debt sustainability concerns, is much more limited.  

A different macro regime

That fragility matters because we are in a fundamentally different macro regime in 2025 than we were in 1995. It’s an environment where policy is more constrained and driven less by sound economic imperatives.

In the mid-1990s, globalisation and disinflation gave central banks considerable freedom to ease policy in times of stress. After the dotcom downturn, the Fed cut rates meaningfully from 6.5% in 2000 to 1% in 2003 to reignite the economy. Today, rates already have been reduced from 5.4% to 3.6% and although inflation has come down, it remains somewhat sticky and above trend.

In the 1990s economic and monetary policies were more conservative and more credible. Bill Clinton won the confidence of the bond markets with higher taxes and the US ultimately ran a fiscal surplus in 2000. Meanwhile, at the Fed, Alan Greenspan was arguably the most influential policymaker on the planet, respected by both the market and political classes.

Today, that credibility is weaker. The political will or ideology doesn’t exist for sensible policies to tackle the deficit and we have a Fed Chair under criminal investigation and about to be replaced, potentially by somebody subject to influence by the administration.

Back to the 1960s and 1970s?

From that perspective, a more accurate parallel may be the late 1960s. Like now a set of high-quality stocks, the Nifty Fifty, were driving the equity market. Just as now they were highly profitable companies that investors “had to own”.  But valuations became stretched, particularly when the benign macro environment of the 1960s was replaced with the macro volatility of the 1970s.

For sure the economy today is fundamentally different to the 1970s (more service-oriented and tech dominated). But the failure of the 1970s was not structural but political. Policymakers repeatedly deferred difficult decisions, allowing imbalances to build. Nixon unsuccessfully tinkered with price controls to address inflation, while at the Fed Arthur Burns was pressured into lower interest rates.

The adjustment eventually came through higher inflation, currency weakness and rising bond yields, delivering a lost decade for equity investors in real terms. Now, with debt/GDP levels already elevated the eventual adjustment is most likely to be felt in the bond market.

The lesson for today is not that markets must collapse, nor that the rally cannot continue like the 1990s. It is that the current macro regime is inherently less stable, policy flexibility is far more limited, and the risks associated with high debt are more consequential.

For investors, the challenge is not to abandon risk altogether, but to recognise that participation in further upside needs to be balanced with genuine diversification and an awareness that the next decade may look very different from the last.

This article was published in the Sunday Business Post on Sunday 18th January 2026