Markets are soaring, but cracks are widening

Global stock markets are basking in record highs, but the mood beneath the surface is far from confident.

This isn’t a calm, sustainable rally. It’s one built on fragile assumptions, stretched valuations, and dangerous complacency. The higher equities climb, the more brutal the eventual reckoning could be.

This summer has rewarded investors handsomely. The S&P 500 and FTSE 100 broke into new territory just over a week ago. Japan’s Nikkei 225 set a fresh peak last Monday. The MSCI World Index has risen around 14% in dollar terms since January. In sterling, the gains look smaller because of dollar weakness, but the scale of the rebound is undeniable.

For many, the scars of April’s “Liberation Day” sell-off now look like a distant memory.

Why the optimism? US corporate earnings have defied expectations, with most companies sidestepping the immediate damage from tariffs. Tech giants in particular have posted robust results, helping to propel markets higher.

Investors outside the US are, it would seem, simply relieved that the feared global trade war has not fully detonated. Adding fuel, the Federal Reserve has bowed to political pressure and trimmed interest rates. Whether justified by economic fundamentals or not, lower borrowing costs have only added to the sense of euphoria.

But this is not a balanced picture. Nerves are showing – and rightly so.

US equities are trading at valuations that are difficult to defend by any measure. The technology sector, in particular, is priced for perfection. Even a modest earnings miss or a shift in sentiment could trigger a sharp revaluation. T

ariffs, meanwhile, are only beginning to bite. The true economic cost of Washington’s import taxes will take time to filter through supply chains, and when it does, the damage will be real.

Bond markets are flashing their own warnings. U.S. Treasuries, the cornerstone of the global financial system, have been described as “eerily quiet.” But this calm is deceptive.

Auctions of new debt have already shown cracks, with weaker demand compared to the past. Investors are beginning to question the sustainability of America’s fiscal trajectory. Contrast this with the UK, where gilt auctions continue to attract strong demand. Washington is testing the patience of global creditors. This patience is not infinite.

High-yield credit adds another layer of concern. Spreads over Treasuries remain wafer-thin, implying investors are demanding little premium for taking on much greater risk.

This suggests markets are underpricing danger not just in equities but in corporate debt as well. If defaults rise or growth slows, those holding riskier credit instruments could face severe losses.

What we’re witnessing is likely the triumph of hope over caution. Investors are assuming corporate earnings will stay strong, tariffs will remain manageable, rate cuts will offset weakness, and debt markets will continue to fund US deficits without revolt. This is a series of optimistic bets stacked precariously on top of one another.

History shows how dangerous such periods of complacency can be. Markets can drift higher for weeks or months while risks quietly accumulate. But when sentiment turns – and it always does – the correction is rarely smooth.

With valuations stretched and safety margins razor-thin, the next shock could be far more punishing than investors expect.

For those serious about preserving and growing wealth, this is the time for vigilance. Blindly chasing the rally is reckless. Diversification is essential. Exposure to defensive assets such as quality government bonds, gold, and even cash should not be dismissed.

Positioning portfolios with resilience in mind is the only rational response when markets are pricing in perfection.

This is not a call to exit markets wholesale. Equities can, and likely will, continue to make gains in the short term. But ignoring the warning signs would be a grave mistake. Risks are mounting, and those who fail to act now will be the most exposed when volatility returns.

Financial markets are cyclical. Periods of exuberance always give way to turbulence. Today’s record highs, thin credit spreads, and strained government finances are precisely the conditions that precede sharp corrections. Investors must not confuse today’s calm for safety. It’s likely the calm before the storm.

The summer surge has been exhilarating. But markets are not invincible, and history has little patience for complacency. Those who prepare for the downturn now will not just survive it; they’ll emerge stronger on the other side.