Markets continue to trade near record highs despite war in the Middle East, renewed trade tensions, persistent inflation concerns and growing unease over the concentration of returns in a handful of technology companies.
This disconnect dominated a recent PWM/FT Live discussion on portfolio risk management under Donald Trump’s second presidency.
“We are now facing multidimensional risks that are continuously being repriced because of the policies and geopolitics that we are facing,” said Deepak Puri, CIO, Americas, Private Bank at Deutsche Bank.
He argued that Trump’s trade, tariff and domestic policy agenda has amplified the supply shocks that first emerged during the Covid-19 pandemic.
Puri even coined the phrase “poly-fragile”, to describe the current market environment. “You don’t have really one stress point that’s driving the markets,” he said. “There are a multitude of stress points that are also very interconnected.”
For many clients, the central puzzle is how equity markets continue to rally despite an increasingly uneasy global backdrop.
“This is the number one question we’re getting from clients,” said Grace Peters, co-head of global investment strategy at JPMorgan Private Bank. “Amid this barrage of headlines that doesn’t feel great, how are markets still reaching new highs?”
Expanding margins
Peters argued that strong corporate earnings continue to outweigh macroeconomic anxiety and said markets were entering an “earnings super-cycle”, driven by AI-led productivity gains, stronger nominal growth and expanding corporate margins.
“We actually think markets are right to rally,” she said. “Over the long term, it’s earnings that drive share prices and earnings have been absolutely stellar.”
Rather than the roughly 7.5 per cent earnings growth that characterised much of the previous decade, investors could now be entering a period of “low-teens earnings growth”, Peters said.
Yet optimism in equities is not fully reflected elsewhere in financial markets, with oil prices and bond yields signalling a prolonged geopolitical and inflationary shock.
Chief investment officers warned that rising bond yields and inflation fears were undermining the traditional role of bonds as portfolio protection, reviving interest in diversification strategies abandoned during the long bull market in equities and fixed income.
“Thinking through assets that can complement a starting-point 60/40 stock-bond portfolio is hugely relevant,” Peters said. “Many portfolios are not prepared for the regime that we believe we’re in now.”
Inflation, meanwhile, is once again becoming the central force shaping portfolio construction and asset prices, according to Sinead Colton Grant, CIO of BNY Wealth.
Inflationary forces
“It’s the foundational building block for every other asset price,” she said. “If you have higher inflation, you have higher interest rates. That affects the discount rate for equities.”
Investors may still be underestimating inflationary consequences of geopolitical disruption in the Middle East, particularly for food prices given the region’s role in fertiliser supply chains and global shipping routes, she warned.
“We could, in addition to energy prices being higher, start to see food price inflation as well,” she said.
Higher inflation, however, does not automatically spell disaster for portfolios. Long-term equity ownership remains one of the strongest inflation hedges available, Colton Grant argued, although investors may need to supplement traditional portfolios with infrastructure and other real assets.
“Over the shorter term, fixed income can be a little bit more challenging,” she said. “That’s when you want to bring diversifiers in and look from a real assets perspective.”
The discussion around commodities exposed one of the clearest disagreements among the panellists.
“Personally, don’t love commodities, don’t love gold. It doesn’t do a lot for you, and there’s a cost to hold,” argued Colton Grant at BNY Wealth.
Energy security
Edmund Shing, global CIO at BNP Paribas Wealth Management, took the opposite view, arguing commodities deserved a renewed role in diversified portfolios after years of neglect.
“I am a big believer in commodities,” he said. “The last four years have clearly shown us that there are periods where commodities can really help diversification in portfolios.”
Investors, Shing argued, had become too comfortable during the post-2008 period, when strong returns from US equities and bonds created what he described as a “false sense of security”.
“You buy the US equity index, the S&P 500, it’s sort of buying an AI-driven index,” he warned. “All bets are on AI.”
Instead, Shing signalled that a broader commodity cycle is beginning to re-emerge, spanning precious metals, industrial metals, energy and eventually agricultural commodities.
“No one wants to be caught by the Strait of Hormuz again in the future,” said Shing, arguing that wars in Ukraine and the Middle East are accelerating efforts to diversify global energy supply chains away from vulnerable choke points.
That is creating investment opportunities not only in oil and gas production outside the Gulf region, particularly in North America, and infrastructure such as pipelines and liquefied natural gas terminals, but also in renewable energy, battery storage and nuclear power.
“Restarting viable nuclear reactors that exist but are not functioning at the moment is obvious,” Shing said.
Security has become the investment expression of geopolitical fragmentation itself.
“If geopolitics is the headline topic making the news, then security is the investment expression of that,” said Peters at JPMorgan Private Bank.
That theme spans energy security, defence, cyber security, supply chains and infrastructure, while also helping investors broaden exposure beyond the heavy concentration in megacap US technology stocks.
Speculative bubbles
AI nevertheless remains the dominant investment story. While CIOs broadly agreed AI would drive a long-term productivity boom, there was less consensus over whether markets are becoming excessively euphoric.
“The market has decided everyone’s a winner. However, we know that is generally not the case,” said Shing, who drew parallels with earlier speculative booms, including the railway boom of the 19th century and the technology bubble of the late 1990s.
“No one’s going to deny the enormous economic importance and the growth potential that AI can provide, but investors may suffer a bit of a hangover later on.”
The current wave of AI investment could ultimately produce significant misallocated capital, even if the technology itself transforms the economy. “We are seeing massive build-out, massive investment, and like with any investment wave, inevitably some of that money will not be productive,” he said.
Even if markets are entering bubble territory, he argued, that does not necessarily mean the rally is close to ending. “Bubbles can go on for a long time,” Shing said.
The greater risk may emerge later in credit markets, where hyperscale technology companies are increasingly borrowing to finance AI infrastructure and data-centre expansion.
“Credit spreads are very tight,” he noted. “We don’t seem to be seeing any ill effects so far, but maybe we will. There are echoes of 1999 and 2000, the TMT bubble,” he said. “History does tend to rhyme.”
Others pushed back strongly against comparisons with the dotcom era.
“Free cash flow margins were around 5 per cent in ’99. Today they’re over 11 per cent,” argued Colton Grant of BNY Wealth “These businesses are generating cash.”
Peters at JPMorgan said concerns around AI were now shifting away from bubble fears towards questions about labour market disruption and automation.
“We actually push back against those bear cases,” she said. “The labour market remains in balance.”
JPMorgan instead sees AI as a long-term productivity revolution capable of lifting developed market growth rates for years to come and “driving an investment cycle we want to be part of, in both public and private markets”.
“The biggest risk right now for AI is not to invest more, it is to invest less,” said Puri at Deutsche Bank, referring to the pressure many technology executives feel to remain competitive.
The nature of the AI boom itself matters, he warned
“We can categorise bubbles into scarcity driven bubbles or productivity bubbles,” he said. “My fear is that this is a productivity bubble.”
While markets tend to recover relatively quickly from productivity-driven bubbles financed through equity markets, the danger emerges when speculation spreads more deeply into debt markets and bank lending, where the consequences become far more systemic, he said.
Dollar dominance under scrutiny
Beyond AI and energy, attention repeatedly returned to whether Trump’s second presidency is beginning to erode confidence in the US financial system itself.
“Part of the US exceptionalism story has been about the strength of the dollar and I wonder whether Trump’s actions have not undermined the status of the dollar,” said Shing at BNP Paribas Wealth Management, arguing that sanctions policy and geopolitical fragmentation were accelerating reserve diversification away from US assets.
Shing pointed to the “weaponisation of the dollar” following Russia’s invasion of Ukraine as a turning point, adding that even Gulf states could now become less willing to rely so heavily on the US currency going forward.
“The dollar will still be the most important currency,” he said. “But its predominance continues to diminish.”
That search for diversification away from dollar assets is also helping to support demand for gold, which JPMorgan believes remains an important hedge in a world of higher deficits, geopolitical fragmentation and reserve diversification.
Confidence in the long-term strength of the US economy nevertheless remains intact among many investors.
“We remain firmly focused on the US as the fastest-growing developed economy, with the deepest and most liquid capital markets,” said Colton Grant of BNY Wealth, arguing that rising household wealth and consumer resilience continued to support the case for US equities.
Chinese wildcard
Even among the more bullish voices, however, there was growing acknowledgment that future US market returns are unlikely to match the extraordinary gains of the past decade.
“When you look at the speed at which we have accumulated debt over the last five years in peacetime, it just doesn’t make much sense,” warned Puri of Deutsche Bank.
Instead of the roughly 13 per cent real annual returns generated over the past 15 years, Deutsche Bank now expects something closer to 5 to 6 per cent.
“That means you double your money in 12 to 13 years rather than six to seven,” Puri said.
Emerging markets also returned to focus as investors search for diversification opportunities outside the US.
“With emerging markets, you’ve got to be active,” said Colton Grant at BNY Wealth. “The ability to be on the ground and pick the individual companies is fundamental.”
Latin America attracted attention because of its exposure to what some investors see as an emerging commodity super cycle, while India was highlighted for its demographics and corporate profitability.
China also emerged as a potential “wildcard” because of its relatively diversified energy supply and cheaper valuations after years of underperformance, according to Peters at JPMorgan Private Bank.
Private credit also came under scrutiny, having grown rapidly in popularity without yet experiencing a full-scale stress cycle.
Concerns around liquidity and fund gating are real but still appear contained rather than systemic, according to Puri at Deutsche Bank.
“The asset class hasn’t gone through many macro backdrops with rising default rates,” he said.
Retail investors may still underestimate the risks of illiquid private market structures, warned Shing, particularly after years of strong returns.
“No matter how many times we tell the client, ‘This is not a liquid structure’ in the good times they only focus on the yields,” he said.
Despite disagreements over commodities, AI valuations and the long-term dominance of the dollar, the CIOs broadly agreed that investors are entering a more volatile era in which resilience, diversification and selectivity will matter more than chasing maximum returns.
“In the long run, it pays to be optimistic,” concluded Shing. “But at the same time, be diversified.”