While investor attention has been largely focused on the war involving Iran, three major risks facing the global financial markets have in fact been largely overlooked.
First, the global economy is increasingly at risk of entering a period of stagflation. Commodity prices had already been rising steadily since the fourth quarter of last year, and oil prices have recently continued to climb amid escalating tensions surrounding Iran. This resurgence in energy prices is once again intensifying global inflationary pressures, while simultaneously increasing the likelihood of an economic slowdown or even recession.
Second, technology companies are significantly ramping up capital expenditures in their race to capture market share in the rapidly expanding artificial intelligence sector. This aggressive investment drive is not only draining corporate cash reserves and pushing leverage levels higher, but is also leading to a notable reduction in share buyback programs, which had previously been a key driver of equity market performance.
Third, private credit institutions and shadow banking entities in Europe and the United States are beginning to face mounting financial strain, as valuations of software companies and commercial real estate continue to decline. The stress is now gradually spreading to the traditional banking sector as well, raising the possibility that non-performing loan ratios could rise sharply in the first half of this year.
As a result, the prevailing view among some analysts – that global equity markets will quickly regain upward momentum and even continue to reach new highs as long as the conflict involving Iran ends in the near term – may be overly optimistic. Such expectations appear to reflect a lingering complacency stemming from the broad-based rally in global equities throughout 2025, while overlooking the fact that many underlying risks have been steadily building since the fourth quarter of last year.
In fact, since the fourth quarter of last year, major US technology stocks have already shown signs of losing upward momentum. Consequently, the Nasdaq Index had begun to decline gradually as early as late October, significantly underperforming the S&P 500 index. This divergence suggests that investor confidence in the AI-driven narrative has been gradually weakening. The primary reason the S&P 500 was still able to reach a new high at the end of January was the continued strength of financial stocks, which were supported by solid earnings in the fourth quarter. However, as problems within private credit institutions and shadow banking systems increasingly come to light, the financial sector itself now appears to be entering a period of heightened vulnerability.
Therefore, whether the conflict involving Iran can be resolved quickly will likely influence only the short-term direction of global equity markets. With several long-standing risks continuing to intensify rather than recede, a correction of around 10 percent to 15 percent across major global equity markets this year increasingly appears unavoidable.
Andrew Wong is a veteran independent commentator
