Wall Street’s Unstoppable Rally: Implications for Australian Retirement Savings

Wall Street has experienced a strong rally this year, delivering benefits to Australian investors through their superannuation funds.

Earlier this year the S&P 500 broke through the 7,600 mark for the first time.

A decade ago the all-time high stood at 2,100, and five years ago it was approximately 4,200.

Australia’s share market has also posted an impressive run, despite some recent softness.

A US academic has argued that Wall Street and global markets have entered a state of “bliss” — a sustained upward trend.

The “bliss” trade posits that governments and central banks are reluctant to allow large firms to fail, given the potential strain on the monetary system.

Moral hazard

The fundamental principle of investing is that higher risk typically accompanies higher potential returns.

This principle was called into question during the global financial crisis, when several major Wall Street banks received government bailouts.

The Troubled Asset Relief Program (TARP) was created to assist large banks that had acquired toxic assets and subsequently faced difficulties.

Although Lehman Brothers was permitted to collapse, it reinforced the notion that certain banks are considered too large to fail.

It created a moral hazard, encouraging executives to take outsized risks, confident that the government might rescue them in the event of massive losses.

TARP concluded over a decade ago, yet it left a lingering moral hazard.

Gemma Dale, director at nabtrade, notes that such investment hubris has been prevalent for decades.

“The Greenspan put fostered confidence that monetary policy could cushion any downside volatility,” she explained.

“That support was a major advantage for investors and traders. The fiscal assistance delivered during and after the GFC has been truly astonishing,” she said.

Today, some analysts contend that governments and central banks, through monetary expansion, are again poised to support large firms facing financial stress.

“I believe this is problematic because it appears to have diminished the concept of moral hazard, which is a concern,” Dale remarked.

In other words, she argues that US corporations currently exhibit a notable lack of moral restraint.

Moral hazard was once a concept to be avoided; today, that fear appears to have been replaced by acceptance of questionable behavior.

Mega IPOs

This risk‑taking approach has arguably enabled SpaceX to debut on the stock market with a record‑breaking initial public offering.

How you came to be aboard SpaceX

If your superannuation is managed by any of Australia’s major funds, you are likely to become a significant financial backer of Elon Musk.

The argument is that Musk’s future plans are essentially speculative, and despite robust revenue growth, the company is not yet profitable.

Its listing price was $135 USD, but Morningstar estimates its value at roughly half that amount.

Other high‑profile IPOs are expected to follow, and firms such as Amazon, Meta, Alphabet and Nvidia continue to expand at exponential rates.

“These are exceptionally profitable firms, yet they are reinvesting all cash into the next big venture,” Dale noted.

“The key question is whether they can successfully execute this strategy,” she added.

For investors, the ability to succeed may be secondary to other considerations.

This week, despite concerns over a protracted Iran conflict and rising US interest rates, billions of dollars flowed into semiconductor stocks.

What underpinned this movement?

“A modest shift in semiconductor sentiment lifted US markets in overnight trading,” Michael McCarthy of Moomoo Australia wrote.

“The rally rested on the most tenuous news flow, narrowly targeting chip manufacturers.”

“It appears that the moral hazard of government underpinning fuels even the most tenuous news to trigger multi‑billion‑dollar inflows.”

The trillion‑dollar question

The central question is whether share markets have become a one‑way bet.

At the very least, with robust support for large firms, can we now rule out a market crash or a severe decline of 40‑50 percent?

The last time US equities fell by over 50 percent was during the global financial crisis.

“As Ray Dalio of Bridgewater Associates has warned, the US is effectively insolvent, and serious problems are likely to emerge,” Dale noted.

“It is inevitable; timing, however, remains extremely difficult to predict.”

This suggests the US government may lack the fiscal capacity to bail out major Wall Street banks should they face distress.

Indeed, the weakening US bond market has served as an early warning sign in recent months.

The US 10‑year Treasury yield reached a two‑year high of 4.6%; a yield approaching 5% is widely regarded as alarming.

Bond yields increase when bond prices fall, as investors demand higher compensation for heightened default risk.

Donald Trump described the bond market as “jittery” after announcing his reciprocal tariffs in April 2025.

Increasing yields or interest rates can be detrimental to stock valuations.

Another potential concern arises from…

The moral hazard inflating large‑cap gains is driving many firms into indices that are tracked by managed funds.

Once constituents are added to an index, index‑tracking funds typically purchase them.

This creates a self‑reinforcing cycle.

Investors betting on central bank back‑up

With the Reserve Bank promising to safeguard market stability, are investors gamifying the notion of risk?

Conversely, Dale cautions that an economic shock eliminating major firms from an index could precipitate a market collapse.

“If investors begin to withdraw, an opposite spiral could unfold,” she warned.

“Thus, the notion that we will never experience a meaningful downturn is, in my view, risky.”

“Moreover, we have been wrong about this for some time.”

“Consequently, many of our superannuation balances reflect the outcomes of this trend.”

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