What can we expect from equities with indices hovering near record highs?

Although markets have experienced a degree of summer volatility in recent years, this August has been the exception, with robust economic data and very strong corporate results driving risk assets to new record highs. But… what should we expect from equities over the coming quarters?

Before we can begin to answer this, it is worth recapping what is currently happening in the financial markets. The reality is that the conflict in the Middle East has not ended, and clashes between the United States and Iran continue on a daily basis. The absence of a truce or de-escalation has caused the price of Brent crude to climb back above $100 a barrel, reaching its highest level since May. The fact that this $100-per-barrel psychological threshold has been breached again has not left the market unmoved, reigniting fears of stagflation.

Investors have already begun pricing in a more prolonged period of elevated oil prices, which has led markets to anticipate faster interest rate rises, pushing bond yields to multi-year highs.

As might be expected, the above has a significant impact on other financial assets, giving rise to a degree of vulnerability to the impact of mounting inflationary pressures and the possible tightening of monetary policy by central banks at a faster pace than expected.

In particular, when it comes to risk assets, we can say that equities have so far managed to absorb this scenario of higher yields well, which is reflected in global indices continuing to trade near record highs. For the time being they are holding up, but could there come a point when this is no longer the case?

Although geopolitical tensions and the sharp rise in bond yields have led to a reduction in risk appetite, with investor sentiment deteriorating, the reality is that, quarter after quarter, corporate earnings remain very healthy. In addition, we continue to see a spectacular upward revision in earnings, with growth of close to 30% in the United States.

The market will continue to keep a close eye on the world of artificial intelligence, and on whether tech companies will remain able to monetise the enormous investments they are making. Should they prove unable to do so, we will reach a turning point at which earnings revisions grind to a halt, but for now, we are nowhere near that point. The reality is that, quarter after quarter, earnings continue to hold firm, and not a single result last quarter suggested that the AI tailwinds are losing steam — quite the opposite, in fact.

All of this, combined with macro data that continues to point to a strong, resilient economy in both the United States and Europe, sets the stage for a scenario in which risk assets could still have further room to run.

Even so, this does not rule out the possibility of volatility and short-term corrections should bond yields continue to show no sign of let-up. In this case, stock markets could stall and fail to rise on the back of strong corporate earnings and a robust economy, but as long as earnings growth holds at current levels and central banks maintain their current stance, declines in equities could represent a good entry opportunity over the medium to long term.

Citywire, 15.09.26