Markets Keep Climbing Despite Rising Global Risks
Global equity markets continue to push toward fresh record highs even as investors grapple with persistent concerns around inflation, interest rates, geopolitical tensions and political uncertainty.
Market Resilience in the Face of Uncertainty
Stock markets have a long history of climbing despite widespread worries, a phenomenon often described as “climbing the wall of worry.” Long-term investors are familiar with this pattern: prices advance even when negative economic, political or social headlines dominate the news.
Today’s wall of worry is built from several significant bricks: lingering inflation pressures, debates over interest rates, political gridlock, high levels of government debt, ongoing conflicts and concerns about stretched valuations. Individually, these issues generate volatility. Taken together, however, they have not yet derailed the broader upward trend in equities.
Geopolitical Shifts and the New Focus on Security
Market corrections, while uncomfortable, play a healthy role in long bull markets by curbing speculative excesses. What typically ends a bull market is not a single event but a cluster of deteriorating fundamentals, tighter monetary policy, slowing economic growth, recession signals or downward revisions to corporate earnings.
We are only a few weeks into 2026, yet the United States has already signaled a clear strategic pivot. Recent military actions, including airstrikes in Venezuela and the capture of its leadership, alongside renewed interest in acquiring Greenland and potential moves regarding Iran, underscore a new emphasis: geographic proximity and supply-chain security now matter more than ever.
This shift coincides with growing global fragmentation. The era of pure cost-driven globalization is giving way to a new paradigm centered on resilience, national security and capital-intensive innovation. These priorities are reinforcing one another through sustained investment, resource constraints and structurally higher costs, trends visible not only in the U.S. but also across Europe and other major economies.
Domestic Policy Tensions and Institutional Challenges
In the United States, tensions between the executive branch and the Federal Reserve have intensified. Public clashes and recent investigations into Fed Chair Jerome Powell have raised questions about the central bank’s independence, the sharpest challenge to its autonomy in recent memory. Similar debates about central bank independence and fiscal-monetary coordination are playing out, albeit in different forms, in parts of Europe.
Technology, Trade and Strategic Partnerships
The global technology race shows no signs of slowing. A landmark U.S.-Taiwan semiconductor agreement aims to strengthen supply chains for critical chips by encouraging production on U.S. soil while offering tariff relief to cooperating firms. This move reflects Washington’s broader push to reshore strategic industries, though it has drawn criticism from Beijing as undermining longstanding frameworks.
Europe is also adapting. Efforts to bolster domestic semiconductor capacity (through initiatives like the EU Chips Act) and reduce reliance on single suppliers highlight a shared focus on technological sovereignty and supply-chain resilience.
Corporate Earnings and Sector Outlook
The Q4 2025 earnings season is underway, with major banks largely reporting solid results despite some pressure from higher technology investment costs and proposed regulatory changes, such as potential caps on credit-card interest rates. Merger and acquisition activity, deregulation signals and improving loan demand suggest a constructive backdrop for financials going forward.
Attention now turns to large technology companies, where investors will scrutinize forward guidance on AI spending, growth prospects and margin trends.
International Market Developments
In Japan, the stock market has remained near record levels following news that Prime Minister Sanae Takaichi may call a snap general election in early February. A strong result for the ruling Liberal Democratic Party could pave the way for more aggressive fiscal support, potentially boosting sectors such as artificial intelligence, nuclear energy and defense, themes already favored by investors.
In the United Kingdom, November GDP rose 0.3%, beating modest expectations after two months of contraction. Attention now shifts to how the economy performed over the holiday period amid political developments.
Outlook for 2026 and Investment Approach
Global stock markets are generally expected to deliver positive but moderate returns in 2026. Support is likely to come from global GDP growth around the mid-3% range, gradually easing financial conditions and continued corporate earnings momentum driven in part by artificial intelligence.
However, elevated valuations in certain markets (especially the U.S.) and persistent geopolitical risks point to ongoing volatility. Consensus forecasts point to low-to-mid single-digit or low double-digit global equity returns, with the U.S. still leading on earnings power. Europe and emerging markets may lag initially but could offer attractive opportunities given their relatively more attractive valuations and potential benefits from any weakening in the U.S. dollar.
Valuation risk remains a key watchpoint, particularly in the U.S., where multiples sit above long-term averages. Short-term vulnerability to new tariffs or geopolitical shocks cannot be ruled out.
Given moderate growth, high (but not extreme) valuations, and identifiable tail risks, we continue to favor staying invested in global equities with a measured approach. This includes balancing core equity exposure with defensive elements such as high-quality bonds. We prefer quality growth companies, with artificial intelligence and automation expected to remain key themes benefiting the U.S. in particular.
At the same time, broader diversification across regions, including Europe, Japan and selected emerging markets, appears prudent. These areas may benefit from cheaper starting valuations and could provide diversification benefits if U.S. leadership moderates.