Are markets at a tipping point?

TO SUCCEED and grow, genuine bull markets must climb a wall of worry one painful brick at a time.

The current bull market recently scaled a particularly steep and uneven wall – comprising stretched artificial intelligence valuations, geopolitical shocks in the Middle East, surging oil prices and repeated recession warnings.

It began in October 2022 and has delivered a return of 106 per cent thus far.

But how long can this resilience continue in the face of a different challenge?

A much stronger-than-expected May jobs report, a clearly hawkish shift in US Federal Reserve tone, rising real yields, a firmer US dollar, and a heavy pipeline of mega initial public offerings (IPOs) have together prompted a more pointed question: Are we at the market top?

On the surface, the ingredients for a classic late-cycle scare are present.

Coming in at 172,000 jobs versus expectations of 88,000, the May employment data significantly beat expectations, pushing rate-cut probabilities sharply lower and prompting a more hawkish Fed tone.

Real yields have risen meaningfully while break-even inflation measures have moderated, indicating that investors are demanding higher real returns on capital.

A stronger US dollar has followed, creating headwinds for non-US assets and US companies with significant foreign revenue exposure. Consequently, Swiss private bank Lombard Odier no longer expects a rate cut in 2026.

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Our base case is for the Fed to maintain its benchmark Fed funds rate at 3.75 per cent through 2026 and 2027.

Supply shock

As if this bombshell is not enough, the market faces an unusually heavy calendar of high-profile IPOs and equity raises.

Google has already pivoted from large-scale buybacks to issuing US$80 billion to fund AI-related capital expenditure. Meta is expected to follow with significant issuance, and SpaceX, OpenAI and Anthropic are seeking well over US$200 billion.

These raises are heavily dependent on passive, market-cap-weighted index funds absorbing the supply. For the sake of retail investors, let us hope they can.

In fact, the new “supply dynamic” marks a clear reversal from the previous decade. Tech leaders that once spent hundreds of billions of dollars on share repurchases are now becoming net issuers.

The previous virtuous circle – strong cash flows funding buybacks, which supported valuations and enabled further buybacks – is evolving or, as some might say, breaking.

In its place is a more capital-intensive model as high-margin software businesses transition towards lower-margin, hardware-heavy AI infrastructure.

This change increases earnings cyclicality and volatility, and introduces potential stock overhang as early investors and insiders look to exit.

A not-too-dissimilar situation is developing in the cryptocurrency space, with Bitcoin experiencing a similar reversal of narrative.

Large holders, including Michael Saylor’s Strategy, appear to be becoming sellers, removing a previous source of structural tightness that had until recently supported prices.

These developments create legitimate technical and fundamental pressures. A heavy IPO calendar can generate rebalancing flows and short-term indigestion.

Rising real rates penalise duration-sensitive assets, and raise the hurdle rate for growth stocks. Geopolitical risks in the Middle East add further uncertainty to both oil prices and the broader growth outlook.

Not yet at the top

So why do I strongly believe that the case for a major top remains incomplete? Two words: growth and earnings.

Corporate earnings have been resilient throughout this cycle and continue to provide the strongest anchor.

Where companies can demonstrate earnings growth that outpaces the rise in real discount rates, particularly in high-productivity areas tied to AI, valuations can remain supported.

The distinction matters. Parts of the market that behave like long-duration bonds without a compensating growth engine are most vulnerable, while quality growth names with robust earnings momentum are structurally better positioned.

But do mega IPOs signal a market peak, as many fear? In fact, the data suggests not.

Historically, well-telegraphed IPO cycles in bull markets have often deepened liquidity and broadened participation once absorbed, rather than marking exhaustion – provided they coincide with still-rising earnings.

And it is worth pointing out that the current pipeline is closely tied to the same structural AI productivity themes that have supported the expansion so far.

Still supportive

To be fair, a period of consolidation or a modest pullback would not be surprising; in fact, it would be healthy.

The repricing of real rates, technical pressures from new supply and geopolitical noise are all valid sources of volatility. Markets rarely move in straight lines, and some digestion of recent data is probably healthy.

However, the evidence does not yet support the conclusion that we have reached a major tipping point. The underlying growth trajectory remains expansionary, and corporate earnings continue to provide a fundamental backstop.

Higher real rates will increasingly separate companies that can generate real earnings growth from those that cannot.

On that distinction, the balance of risk still favours remaining invested in quality growth, rather than stepping aside in anticipation of a top that the fundamentals do not yet justify.

They say bull markets do not die of old age, they are murdered by the Fed – typically, when rates are raised. We believe rates will remain on hold well into 2027, while growth and earnings remain sufficiently robust to support the ongoing market rally.

We thus keep our overweight equity allocation unchanged.

The writer is chief investment officer, Asia, Lombard Odier