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Trade wars, Middle East conflicts, US–China rivalry, rearmament, mounting debt. And how do the stock markets react? They continue to reach new record highs – with remarkable composure. Market volatility is as low as it has been in a long time. “Quiet phases paired with record highs are often a harbinger of structural breaks,” warns Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM.

The global financial world appears optimistic and relaxed, seemingly unshaken by geopolitical tensions, sluggish economic growth in many regions, and the fundamental uncertainty sown by US trade policy. The S&P 500 is scaling new all-time highs, as is Germany’s DAX. At the same time, the well-known measure of market volatility – the VIX – remains at an exceptionally low level of under 20 points. A deep calm seems to hang over the markets.

“But this calm is deceptive,” says Fischer. Historically low volatility combined with record levels has often preceded major corrections – even if the sharp drops investors fear tend to materialise with a significant time lag. “A crash is by no means inevitable,” Fischer adds, “but valuation risks are quietly and steadily building up.”

There are, on the one hand, valid reasons for the highs in the markets: the DAX is benefiting from hopes around announced special funds and additional spending on infrastructure and defence. In the US, corporate earnings are close to record levels – despite continued tight monetary policy and a tense political environment.

At the heart of current market developments lies investors’ seemingly unconditional faith in tech giants and the underlying force of artificial intelligence. The expectation of an unstoppable AI boom is pushing tech behemoths such as Nvidia, Microsoft, and Meta into dizzying valuation territory. This is fuelling the markets – and with them, the prices of passively managed index funds, which are seeing inflows worth billions.

“There is every reason for increased vigilance,” says Fischer. “Because the current market calm could reflect a passive wait-and-see attitude, rather than genuine stability.” Furthermore, in such tranquil periods, investors tend to underestimate risk – which can lull markets into a dangerous complacency. Volatility could suddenly spike if the dominant narrative changes – for example, if the story of AI’s unstoppable success falters. Should earnings or outlooks from the likes of Nvidia disappoint, even minor shocks could destabilise the market. Losses in individual heavyweight stocks could quickly drag down the broader indices.

“This creates hidden risks in passively managed portfolios, which no longer offer true diversification,” Fischer explains. A shift in valuations could also occur in Europe if political risks or economic disappointments turn investor sentiment. “Active investment strategies and a critical eye on supposedly unbeatable trend themes are more important than ever in times like these,” Fischer concludes.