Markets are complacent, but volatility is coming
Markets are coasting on a wave of optimism that looks increasingly untethered from reality, writes Nigel Green.
With the S&P 500, among other indices, brushing against record highs and tech stocks powering ahead, it would be easy to mistake this rally for resilience.
But it's not resilience, it's complacency.
This isn't about fearmongering. It's about realism. While equities flash green, warning signs are piling up fast: renewed trade tensions, stubborn inflation risks, ballooning government debt, and a bond market that's growing less patient by the day.
Add to that the thin trading volumes of the summer months, where small shifts can trigger outsized moves, and we're staring at the likelihood of a sharp uptick in volatility.
Take trade. The US has reignited its protectionist agenda, with fresh tariff threats aimed squarely at China. Talks have stalled, temporary deals remain toothless, tariff levels are still punishing, and supply chains remain under pressure.
With rhetoric on both sides remaining pretty much the same, markets are underestimating the risk of another escalation. Unlike previous episodes, this is not a minor skirmish, it's a deepening economic contest between the world's two largest economies.
Inflation is another pressure point. Investors are betting that price growth will continue cooling, nudging central banks toward rate cuts. That's a risky assumption.
The next round of data could easily surprise to the upside. Labour markets remain tight, and input costs from tariffs and energy are beginning to creep higher. A fresh inflation spike could push rate-cut hopes further into the distance, and valuations would have to adjust accordingly.
Also, the bond market is already signalling discomfort. Treasury yields have been climbing, not because of runaway growth, but because of mounting supply.
The US is issuing record levels of debt to finance deficits that show no sign of narrowing. Overseas buyers, especially China and Japan, are stepping back.
The result is weaker demand, rising yields, and a higher cost of capital rippling across the economy. This isn't the backdrop for a smooth rally in equities.
At the same time, corporate America is flashing its own warning lights. Layoffs are accelerating.
Major firms across tech, finance, and entertainment have all announced significant job cuts in recent weeks. While markets perversely reward these announcements in the short term — interpreting them as margin-boosting measures — the deeper implication is that companies are preparing for slower growth. The earnings optimism driving stocks upward is, in many cases, built on sand.
Yet despite all of this, there's still a strong case for opportunity.
Volatility isn't inherently negative. It's disruptive, yes. But it's also the source of market mispricing, and mispricing is what creates the space for outperformance. When consensus gets lazy, as it has now, bold positioning has room to shine.
That's especially true in this moment. The convergence of rapid technological progress — particularly in AI, automation, and productivity-enhancing innovations — is starting to reshape the profit potential of entire sectors. These forces are disinflationary over the medium term, even as short-term price pressures remain stubborn.
The companies that harness them early will not just weather volatility, they'll emerge stronger.
The key is not to flee risk, but to understand it and position intelligently. Passive portfolios anchored to a backward-looking view of the economy are vulnerable.
Diversification across geographies, sectors, and asset classes, will matter more than ever. So will exposure to forward-facing megatrends, from clean energy to semiconductors to AI infrastructure.
This summer, markets won't drift quietly. With liquidity thinner, every data release and policy signal will carry more weight.
Sudden swings are not just possible but likely. But that's precisely what makes this period one of the most promising entry points in recent memory. Those who wait for perfect clarity will miss the window.
The exuberance in today's equity markets is not sustainable. It's built on the hope of soft landings, timely rate cuts, and diplomatic breakthroughs.
But hope isn't a strategy. The coming months will test the market's assumptions and many won't hold. Yet that doesn't mean retreat is the right move, it means preparation is key.
Investors willing to engage with this volatility, not hide from it, are far more likely to capture the upside when it comes.
Nigel Green, is the group CEO and founder of deVere Group, an independent global financial consultancy.
The views, information, or opinions expressed in the interviews in this article are solely those of the author and do not represent the views of Stockhead.
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