A resilient cycle, but a narrower and more complex path

Market volatility has picked up again, as markets continue to grapple with many of the same questions raised earlier in the year: whether growth can remain resilient, whether policy expectations are too benign, and whether increasingly narrow leadership can continue to carry broader asset prices.

Growth has slowed in some regions, and expectations have been revised lower in parts of the developed world, but the broader picture is still one of positive nominal growth, continued fiscal support and robust earnings in several areas of the market. Corporate profitability, particularly in parts of the US and across AI-related infrastructure, has stayed stronger than feared.

At the same time, the policy framework has become more complicated. Labour markets are still firm, energy remains a source of uncertainty and the current capital expenditure cycle – particularly spending on AI and related infrastructure – is adding to near-term demand. An additional source of uncertainty has emerged from the change in leadership at the US Federal Reserve. A more restrained approach to forward guidance and a stronger emphasis on inflation credibility could contribute to a more structurally firm US dollar and tighter global financial conditions.

Subtle changes in liquidity, momentum and valuations
In a number of major economies, liquidity indicators have rolled over in recent months, and leading signals suggest further softening ahead. Importantly, this deterioration has not yet fully translated into weaker market performance. From a portfolio perspective, this supports a more selective approach to risk assets.

A further development worth noting is the re-emergence of large-scale equity issuance. After several years in which major technology companies were significant net buyers of their own shares, the cycle is shifting. A number of large-cap and AI related companies are increasingly tapping equity markets to fund ongoing capital expenditure. While this reflects strong demand for investment and the scale of the current capex cycle, it also represents a potential headwind for broader equity markets.

Equity indices in several developed markets (DMs) are still trading close to highs and longer-term trends are supportive. But leadership has become increasingly concentrated, with a relatively small number of sectors and themes accounting for a disproportionate share of returns. The most obvious example continues to be the AI and semiconductor ecosystem, where strong earnings growth and substantial capital investment have reinforced already positive trends.

This concentration creates a more fragile form of price momentum. The greater risk is that expectations become too elevated, valuations too stretched and markets too dependent on a limited set of outcomes. However, current consensus forecasts still imply robust earnings growth continuing into 2027, with elevated margins expected to further expand across several sectors despite a more complex macro background.

If the growth and earnings outlook continues to deliver, there is still upside potential. But if any of the supporting assumptions weaken – whether through inflation, policy, liquidity or earnings disappointments – the downside can be more meaningful because expectations are already high.

There are still regions, sectors and asset classes where valuations are supportive, particularly in parts of EMs, select DM sectors such as financials, and in fixed income, where real yields are more attractive than they have been for many years. Among commodities, gold continues to play an important role as a geopolitical and diversification hedge.

Where could markets go?
Against this backdrop, our forward-looking scenario analysis reflects a more balanced distribution of outcomes than earlier in the year. In aggregate, this still implies a higher probability of constructive outcomes than negative ones. The macro and earnings setting is supportive, with structural drivers, such as AI-related capital expenditure, continuing to underpin markets.

The “Goldilocks” outcome, where market leadership broadens beyond AI-related themes (both regionally and sectorally), is still plausible and is the team’s highest individual market scenario probability. Similarly, our “Blow-off top” scenario, driven by continued momentum in AI-related themes and capital flows into a narrow set of assets, is still relevant.

At the same time, the risk of more negative outcomes has increased. Scenarios in which inflation proves more persistent, liquidity deteriorates further or market concentration unwinds now form a meaningful part of the overall distribution. This reinforces the need to construct portfolios for a number of potential paths, rather than anchor them to a single central case.

Translating this into portfolios
In practice, this has prompted a number of clear portfolio actions:
• Maintain exposure to global equities, but broaden beyond the most concentrated parts of the market
• Reduce exposure where momentum and positioning appear most crowded and valuation support is limited
• Increase selectivity within equities, including second- and third-order beneficiaries of the capex cycle
• Manage duration carefully in fixed income, recognising both attractive real yields and the risks around curve dynamics
• Remain cautious in credit, with an emphasis on quality and liquidity
• Actively manage exposure to commodities and gold, recognising their evolving role within portfolios

Importantly, risk management has become more central.

Conclusion
The current environment is resilient, but it is becoming more complex. The global economy has shown a degree of resilience that would have been difficult to predict at the start of the year, particularly given the scale of the geopolitical and inflation shocks that have occurred. Still, some of the conditions that have supported markets – including liquidity, valuations and policy flexibility – are becoming less favourable.

This points to a narrower and more demanding path forward. Markets can continue to perform and the cycle still offers opportunities, but the balance of risks has shifted and the range of plausible outcomes has widened.