Global markets face rout as shocks collide with lofty valuations

Is it time to start worrying? When investors and economists look back on the first few months of 2026, they might reflect that this first quarter was the moment when several destabilising pressures – each potentially manageable on its own, but together structurally problematic – arrived simultaneously.

Last week certainly felt like it. Global equities are on track for their worst month since 2022. The MSCI World index has shed almost 6% in the past three weeks. The Cboe Volatility Index, Wall Street’s favoured measure of fear, briefly surged above 30 in recent days – more than double its level at the start of the year. The S&P 500, the main US equity benchmark, has swung by at least 1% intraday on more than half of this year’s trading sessions.

Since 2022 markets have just continued grinding up. This might all be about to change.

The energy supply crisis

Three distinct but increasingly entangled threats lie behind this turbulence. The first, and most obvious, which has been covered in detail already, is America and Israel’s foolhardy war on Iran and a looming energy supply crisis. It was only in December that Brent crude, the global benchmark for oil, was below $60. It is now more than 75% higher, above $100, and shows no sign of retreating.

Trump’s unfathomable decision to attack Iran, no matter what he may now unintelligibly argue, has injected a new and potentially long-term shock into the global economy at a time when investors were already grappling with an array of forces threatening to upend investor confidence.

Whatever the geopolitical and humanitarian consequences of that decision – and these tower over any market consequences – the economic fallout is already being felt. Energy costs are rising sharply for households and businesses alike, particularly in Europe. The Gulf economies are on track for their sharpest correction since the 1990s, making even the financial crisis of 2008 look mild.

Soaring energy bills complicate the picture for monetary policy. Markets had expected rate cuts from the Federal Reserve, and similarly the SA Reserve Bank. Those hopes are now fading.

The parallels with 2022 are hard to ignore. Then, a combination of pandemic-era reopening and Russia’s invasion of Ukraine sent inflation soaring, crushed bond markets and simultaneously smashed equities. Other than cash, investors had nowhere to hide. The fear today is that a similar stagflation sell-all mentality will take hold.

AI disruption threats

Second is AI’s impact on the broader economy. Since early February, markets have been rattled, not by fears that artificial intelligence might fail, but by mounting suspicion that it will succeed, and rather sooner than many had assumed.

The prospect of capable AI systems rapidly eroding the revenue streams of businesses across software, professional services, media and finance is starting to unnerve investors. Share prices across these sectors have already come under pressure as anxious shareholders head for the exits.

These concerns are increasingly not confined to equities. Corporate junk-bond spreads have widened by about half a percentage point from their January lows, partly reflecting anxiety that AI-driven disruption will impair the earnings of heavily indebted companies before they have the chance to adapt.

Such fears are not fanciful. The history of transformative technologies suggests that the transition period – when incumbents lose market share faster than they can develop commercially viable business models – is a period of opportunity, but also risks. Not all are equal when facing the threat of disruption.

Furthermore, markets are beginning to question whether AI itself offers a reliable and sustainable investment case, given its enormous capital requirements. The investor darling of the sector, chip maker Nvidia, is broadly flat since last August. As a result of these dynamics, both the disruptors and the disrupted are increasingly seen as uncertain bets.

Cracks in private credit

The third pressure point is perhaps the least visible to most investors, but potentially the most consequential; the private credit market, worth close to $2-trillion. This sprawling ecosystem of non-bank lenders, which fund companies that can’t access public debt markets, has been growing at a remarkable pace for much of the past decade. Until now.

Default rates on American private credit rose to 5.8% in the 12 months to January, according to Fitch Ratings. This is the highest level since inception. A significant share of private equity-backed companies, many of which rely on this market, are already under financial stress, according to Bloomberg data. A convergence of excessive leverage, weak operating cash flows and overly relaxed debt documentation has created febrile conditions for a wave of corporate defaults.

The oil shock has sharpened these vulnerabilities. Higher energy costs squeeze the operating margins of the businesses that private credit lends to. Renewed inflationary pressure pushes out the expected timing of interest rate cuts that many over-leveraged borrowers were counting on to ease their refinancing burden. The ironic twist is the private credit industry’s heavy concentration in software companies; these are precisely the firms most exposed to AI-driven disruption.

The sum of the parts

Each of these dynamics – oil and inflation, AI disruption, private credit stress – might have been manageable in isolation. The problem is that they are interacting in ways that amplify rather than offset one another, and are arriving at a time when asset valuations – by historical measures – remain very high. A market trading at stretched multiples does not require much to cause a serious correction or bear market.

Every year since 2022 has been eventful. But markets have only gone one way since then; up. It is looking increasingly likely that a reckoning is due.

The question is how disastrous it will be. A mere correction, or a Götterdämmerung? The odds are starting to shift to the latter. DM