Have equity markets become complacent?

By Joe Aylott, Multi-Asset Strategist

• Equity markets’ resilience in the face of this year’s energy sector volatility has prompted questions about whether investors are being complacent.
• But equity markets are actually inherently forward-looking and, in our view, discount cash flows further into the future than investors often appreciate. The long-term outlook remains constructive, supported by the productivity gains artificial intelligence could deliver.
• For long-term investors, this highlights the importance of focusing on structural fundamentals rather than short-term market noise. At Coutts, this principle sits at the heart of our Anchor & Cycle investment process.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs. This publication should not be taken as advice.

The first half of 2026 delivered a rise in economic uncertainty. As escalating US-Iran tensions disrupted shipping through the Strait of Hormuz (the conduit for around a fifth of the world's oil), Brent crude rose to around $118 a barrel in April – its highest level since 2022.

Oil prices fell back towards pre-conflict levels once ceasefire negotiations showed progress in June. But the episode raised the prospect of more persistent inflationary pressure, fewer rate cuts, and weaker near-term growth.

Despite this, financial markets have remained resilient – with the US S&P 500 rising by 10.2% in the first six months of 2026 (as at 30 June). This has led to concerns of equity markets becoming complacent, ignoring the risks and allowing themselves to be swept along by a tide of excitement around artificial intelligence (AI).

But we view the situation differently. While a range of factors has supported markets, we believe a key reason for their resilience is their inherently forward-looking nature.

Evidence indicates that asset prices are ultimately driven less by today's headlines and more by expectations for future earnings and cash flows. Investors are continually assessing what companies may be worth years from now, rather than focusing solely on more immediate economic and geopolitical uncertainty.

Viewed through that lens, recent equity market behaviour becomes easier to understand. Although near-term risks have become elevated, expectations for medium and longer-term earnings growth have remained solid.

AI is indeed a significant contributor to this positive outlook, but not simply because it has captured investors' imagination. It is increasingly seen as a potential source of stronger productivity growth, greater efficiency and higher long-term earnings across a range of industries.

Why future earnings matter

Shares represent ownership in a company, giving investors a claim on the cash flows it is expected to generate in the future. This means the value of an equity investment depends not only on current earnings, but on a business’s expected profits in years to come.

One of the most widely used methods for estimating a company's value is the discounted cash flow (DCF) model. This approach adds together a company's expected future cash flows, while adjusting them to reflect their value today and the likelihood of them actually being received. A DCF analysis also shows how much of a company's value is derived from earnings expected in the near term versus the long term.

To illustrate how forward-looking markets really are, we applied this framework to the US equity market, using assumptions for earnings growth and discount rates. We then estimated how much of today’s market value is driven by earnings expected over different time horizons – specifically more than one year, five years, and 10 years.

The results painted a clear picture. Our analysis suggests that around 70% of today’s value of the US equity market is derived from cash flows expected more than 10 years from now. Looking beyond five years, it is almost 80%.

These figures will differ for different parts of the market. High-growth businesses, for example, often derive an even greater proportion of their value from earnings expected well into the future. This is perhaps best demonstrated by this year’s wave of Initial Public Offering activity. Companies with limited earnings today have achieved high valuations where investors see potential for profits further down the road.

This analysis helps explain why markets can often absorb significant short-term disruptions without suffering lasting damage. Events such as geopolitical tensions, energy price rises or temporary economic slowdowns can affect sentiment. But their impact on valuations may be limited if investors believe they are unlikely to materially alter the long-term path of corporate earnings.

For long-term investors like us, it also reinforces the importance of looking beyond near-term earnings uncertainty and focusing instead on forward-looking drivers like productivity growth and structural economic change. This is exactly what we do through our Anchor & Cycle investment process. The Cycle element looks at present challenges and where we are in the business cycle, while Anchor focuses firmly on long-term, structural fundamentals.

A quick note on our calculations here. We assumed annual earnings-per-share growth of 6% and an investor required return of 9.5% – the latter being consistent with the work of Professor Aswath Damodaran, a leading authority on DCF analysis.

Markets are not invincible

Of course, none of this means equity markets are immune to long-term risks. Some developments can have a lasting effect on both economic growth and corporate profitability. Recessions are significant examples. They tend to reduce earnings, weaken investment and lower the valuations investors will pay.

The Global Financial Crisis of 2008/9 demonstrated this. While economies ultimately returned to growth, many experienced years of weaker productivity, reduced investment, and higher levels of public debt.

Economies and markets eventually tend to recover from recessions, but they can cause what economists call economic ‘scarring’ — the enduring effects of a downturn that persist long after the recession itself ends.

Relentlessly forward-looking

In our view, this all underlines the importance of separating long-term signals from short-term noise. Long-term economic and earnings growth prospects drive long-term investment outcomes, which is why equity markets often look through temporary disruption and towards future growth.

They can exhibit remarkable patience as long as conditions are ultimately improving – even if short-term risks are material. The recent uptick in productivity growth is encouraging in this context – and should remain key for the path of equity markets moving forward.

In short, market resilience so far this year should not be mistaken for complacency in our view. It instead reflects a disciplined focus on the drivers that truly matter.