During his seminal Davos 2026 speech, Canada prime minister Mark Carney declared the end of the rules-based geopolitical order, describing it as a “rupture, not a transition”. Global equity markets, however, tell a different story.
Rather than rupturing under the weight of macroeconomic shocks, markets seem increasingly willing to absorb them and move on. Between them, the Middle East conflict and AI driven technology boom now represent the next great test of this new market order.
The market’s resilience has been building for some time. Since 1970, the MSCI World Index has experienced 30 episodes of drawdowns reaching 10% or more. Intuitively, the deepest drawdowns should take the longest to heal – yet recent corrections have been noticeably shallower and the recoveries faster.
Four of the five fastest recoveries occurred after 1998, with three happening in the past decade. This clustering of ‘V shaped’ recoveries is not an artefact of a few outliers – it is a defining feature of the modern market.
Twin forces
Two forces explain this shift. First, policy reaction functions have changed. The responses to the global financial crisis and the Covid pandemic show central banks and fiscal authorities are willing to act quickly and forcefully in periods of market and economic stress.
Forward guidance, emergency facilities and large scale balance-sheet operations have compressed the depth and duration of many risk off episodes. Put simply, every time the market falls off its bike, the authorities wipe its knee.
Second, market structure has evolved. The rise of indexation, systematic investment strategies and options-based hedging has changed both selling pressure and subsequent demand. Forced derisking can drive rapid price moves on the way down but, once volatility normalises, balanced and target volatility strategies can mechanically re risk, generating equally rapid flows back into risk assets.
“Rather than rupturing under the weight of macroeconomic shocks, markets seem increasingly willing to absorb them and move on.
If you look at bond yields or corporate earnings, you have to squint to see an international crisis unfolding.”
Retail participation has reinforced this pattern, particularly in the US. Retail investors have tended to buy the dips and in periods of elevated volatility. They are also more narrative driven than fundamentals driven, which may help explain why dominant US growth has recovered so quickly.
It could also be why global equities merely blinked as the Middle East crisis emerged. Markets have rebounded above previous highs at a speed that would once have been considered extraordinary. Likewise, if you look at bond yields or corporate earnings, you have to squint to see an international crisis unfolding.
Twin shortages
This, we believe, is an economic tale of twin shortages: oil and compute. The closure of the Strait of Hormuz has tightened crude and refined product markets, while the AI revolution has created a shortage of compute power and advanced semiconductor chips. The former is inflationary and ultimately demand destroying. The latter is growth generating, driving investment, productivity expectations and a step up in corporate earnings we have not seen in years.
Bond markets are beginning to register the energy shock – though not yet in a disorderly way. Higher oil prices create a stagflationary mix: rising input costs, weaker real incomes and softer demand. Short term inflation expectations have edged higher, while longer term measures remain broadly anchored, suggesting investors still trust central banks to absorb another shock.
Equities, meanwhile, are focused on the other shortage: compute. As long as the AI investment trend continues, and rates remain orderly, the chip and compute shortage appears to have the upper hand. Bull markets of this force are usually derailed not by geopolitical shocks alone, but by rapidly rising bond yields.
None of these explanations is entirely satisfying. It may be the market is right to deflect the inflation shock as temporary, to disregard the dire fiscal position of governments everywhere. Growth is the great redeemer, and it may be that we are looking at an AI productivity Nirvana. Evidence of this has yet to show up in the data but, for the moment, markets remain resilient and buying the dips remains a sound strategy. They are ‘un-ruptured’.
Justin Thomson is head of the T. Rowe Price Investment Institute
