The Great Decoupling — why global markets are shrugging off war and fear

Equity investors are often stereotyped as being glass-half-full types, but this first quarter has challenged even the most optimistic among them. A war in the Middle East that the International Energy Agency has dubbed the gravest threat to global energy security in history. American tariffs at their highest since the early 1940s. A US president who seems to be completely unhinged, even at times genocidal. And yet global equity markets are within touching distance of all-time highs.

To understand what has been driving them higher, it helps to look past the headline numbers. While the benchmark US index the S&P 500 is up 4% thus far in 2026, this figure conceals a huge amount of volatility along the way.

Markets were broadly flat until late February, when the decision of US President Donald Trump to bomb Tehran and decapitate the Islamic Republic alongside the eternally bellicose Israeli Prime Minister Benjamin Netanyahu spooked investors. Within days the Strait of Hormuz was blocked, oil was skyrocketing, and markets were tanking. The S&P 500 fell almost 10% in a month.

Then, from the start of April, everything reversed. Ever since negotiations between Tehran and Washington were mooted, markets have been on the front foot; “buy the dip” has been, once again, a spectacularly successful trading strategy. Any investor brave enough to have piled into equities at the end of March would have been more than 12% up in merely two weeks. This recovery has occurred despite the ceasefire remaining fragile, the strait still closed and any durable resolution feeling as remote as ever.

Ignoring the noise

What is becoming clearer is that markets have, with a few exceptions, simply decided that Trump is not worth pricing in. Trading on tweets, without insider knowledge, is a guaranteed recipe for value destruction.

This can be seen in the decoupling of equity markets and volatility. In more usual times the Vix, a headline measure of market fear, is inversely correlated with valuations. When people are fearful they tend to sell, driving markets lower. This relationship during the second Trump administration has broken down. Vix has spiked, yet markets have pushed higher.

What has been driving this change in sentiment? Two things stand out. First, on 30 March, long-term interest rates peaked and began to fall. Lower rates loosen monetary conditions, support speculative assets and weaken the dollar; a combination that explains much of what followed. The weaker dollar in particular explains part of the strength of emerging market stocks such as the JSE; a strong dollar prompts capital to flee emerging financial systems.

Second, valuations had become more compelling as investors waited for an opportunity to “buy the dip”. Earnings expectations, somewhat counterintuitively, never stopped rising during the sell-off. The S&P 500 briefly traded under 20 times future earnings, the cheapest since the “Liberation Day” sell-off a year earlier. Investors with long memories looking for an excuse to buy did not hesitate.

The composition of the rally reinforces this reading. The S&P 500 Growth Index, which had been sold off the most aggressively, has climbed an astonishing 16%. But gains have notably been broad, with American small-caps, European equities, Japanese stocks and – notably for SA-based investors – emerging market shares having all participated.

Huge rally in Magnificent Seven tech stocks

Zooming in on the sector performance of the S&P, an obvious factor is the huge rally in the Magnificent Seven tech stocks. The seven (it is more instructive to count chip maker Broadcom, not Tesla, as the seventh member) account for 60% of the return of the S&P during the rally. Whether this represents a genuine reassessment of tech’s prospects or simply a mechanical snap back of the most sold off names remains to be seen.

South African markets have followed a similar trajectory, mirroring the global benchmark, albeit in an even more volatile fashion. The JSE Top 40 started the year on the front foot, with soaring gold stocks and optimism over a nascent SA economic recovery pushing it to all-time highs in late February. The war, however, punctured any illusions, with gold collapsing and the index dropping almost 16% to mid-March. But since then, investors have piled back in. The benchmark Top 40 index is now up almost 4% year to date.

Perhaps the most surprising – or disappointing, depending on which way one sees it – asset class thus far this year is Bitcoin. Down 15% year to date, and down 12% over the past 12 months, it is not that it merely seems out of favour, it is more existentially starting to lack relevance. Nothing really seems to be able to meaningfully break it out of the trading band it has been stuck in for months. Increasingly, it seems the speculative punters have tired of crypto and moved on, seeking headier sugar rushes in gold and on Polymarket.

The risks that remain

What will then determine the course of markets over the next quarter? Most obviously, oil will be fundamental. Brent crude peaked at $118 a barrel at precisely the moment the equity markets bottomed, and has subsequently fallen almost 20% – the mirror image of the equity rally.

Should the Strait remain closed and oil start spiking this could be a classic “bull trap”, with equities falling once again. Eternally optimistic even in the midst of this morass, investors are buying the hope of traffic through the strait normalising, not the news.

Bond yields, too, will be crucial. Unusually, Treasuries and equities have moved in tandem this year, rather than their usual inverse relationships. This has raised uncomfortable questions about whether American government debt is still functioning as a genuine safe haven. Should inflation fears resurface – or, more gravely, should investors grow nervous about America’s capacity to service its ever-mounting debt burden – a sell-off in bonds could ripple across asset classes.

As for the broader US economy; it lurks in the background, largely ignored. Job growth has held up, but only barely. The housing market remains sluggish, even after three listless years. Capital expenditure outside of AI data centre spend has been lacklustre. The US economy is not in recession, at least officially, but neither does it feel like it has any forward momentum. This complacency may itself be the largest unpriced risk of all.

Investors are clearly seeing the glass half full at this point. From staring into the abyss in March, once there was a glimmer of hope it prompted them to go all in. It would be a brave contrarian to bet against the global stock market’s extraordinary and repeatedly vindicated capacity for optimism.

Then again, at these ever higher valuations and with so much still unresolved, fortune may favour the wary. DM