Volatility is back: what it means for bonds, equities and AI

After a turbulent 2025, few investors are expecting calm waters ahead. Markets are grappling with geopolitical uncertainty, shifting policy regimes, rapid technological change and asset prices sitting near historic highs. The volume of information is relentless, and the temptation to react to every headline has rarely been stronger.

For many Australian investors, the challenge is no longer simply where to invest, but how to separate what matters from what doesn’t.

That tension sat at the heart of Schroders’ Eyes on the Upside: Where active sees opportunity in 2026 webinar. Sebastian Mullins and Ben Arnold argued that while markets feel unusually noisy, the underlying investment environment is becoming more familiar, not less. 

The low-volatility, low-inflation conditions that defined the post-GFC era were the anomaly. What investors are experiencing now is a return to a regime where policy intervention is more visible, outcomes diverge more sharply, and markets no longer move in lockstep.

For Australian investors, that shift has real consequences. Bonds no longer offer the same diversification and protection benefits investors relied on in the post-GFC era. Equity markets are increasingly rewarding selectivity over broad exposure. And opportunities are widening beyond US mega-cap technology as leadership begins to fragment.

Rather than retreating from volatility, Mullins and Arnold argued that this environment reinforces the case for active, selective investing. As Mullins pointed out,

“We believe we're now in a new investing environment… more similar to the past hundred years… more government intervention, more volatility, more inflation.”

Below, I summarise the highlights of the webinar. 

A new era of volatility that looks more like history

Mullins opened by reframing how investors should interpret recent market turbulence. Daily headlines around geopolitics, policy announcements and political rhetoric can feel overwhelming, but he argued they are symptoms of a deeper structural shift rather than isolated shocks.

“I think as investors, we can get quite bogged down communicating the nitty gritty, what Trump is tweeting or Truthing… Greenland, Venezuela, Iran,” he said. “But I think it's more of a symptom of a deeper thing going on between markets right now.”

That deeper change is a move away from the post-2008 regime of very low inflation, low interest rates and low volatility, towards an environment where governments play a more active role in shaping outcomes.

“You had the invisible hand of free markets… It's now a very visible hand where governments are taking stakes in companies,” Mullins said.

This increased intervention creates more volatility and clearer winners and losers.

“More winners and losers,” he noted, “but you have to be a bit more active when it comes to picking where to allocate to, because there are far-reaching consequences of those actions.”

Record highs, but healthier market behaviour underneath

Despite geopolitical uncertainty and elevated volatility, equity markets continue to push higher. Arnold cautioned against interpreting that strength as a sign of complacency.

“In pretty much every market, you're seeing it reach new highs,” he said. “We're trying to remain grounded and look what's going on underneath.”

One of the most telling shifts, in his view, is falling correlation within the US mega-cap cohort. 

“Five out of seven of the Mag seven underperformed the S&P last year,” Arnold said. “That is a sign of a more healthy equity market that has been really discerning as to where it wants to take risk.”

For active managers, this environment is constructive. “We don't want everyone winning,” he added. “We want clear distinction between winners and losers.”

Rather than being driven by a single theme or factor, returns are increasingly diverging at the company level, reinforcing the importance of selectivity and bottom-up analysis.

AI enthusiasm and the warning signs to watch

AI remains the dominant investment narrative, but Arnold warned that enthusiasm alone is not enough to justify the scale of investment. He highlighted two key “canaries in the coal mine” that investors should monitor closely.

“Leverage magnifies the good but also the bad. When we start to see companies take on huge amounts of debt that isn't serviceable through cash flow, that's a red flag.”

The second risk is whether capital spending ultimately earns an adequate return. “Are these companies ever going to get a return on that investment? Is future revenue really going to justify the massive CapEx upgrades?” Arnold queries.

The answer hinges on adoption. “You have to see mass widespread adoption of AI tools, not just at work, but also in your home life as well,” he said. Without that, margins and earnings expectations will struggle to justify today’s investment levels.

Why US growth still matters and how reliable the data is

The US economy remains central to the global outlook, and Mullins argued that its resilience has been underestimated. “We've been seeing GDP prints in the threes… very, very strong GDP growth,” he said, noting that consumption rather than government spending has been the primary driver.

“That’s a far healthier way to have GDP growth,” he added. Wage growth continuing to be positive in real terms, alongside strong retail spending, points to a resilient consumer, but employment remains the key variable to watch. “You lose your job, you stop spending pretty quick,” Mullins said.

Concerns around data reliability following government shutdowns were acknowledged. “When the shutdown was happening, it was not reliable at all,” he said. However, Mullins noted that alternative indicators can help fill gaps. “You can actually look at listed rents on the internet… Zillow rental indices… different things to look at to ensure the government data is correct.”

While another shutdown could reintroduce uncertainty, he stressed this is not currently his base case. For now, labour market dynamics remain supportive.

Concentration risk, global opportunities and the rates outlook

Arnold was blunt on concentration risk. 

“In short, very worried,” he said of passive exposure to the Magnificent Seven. “If you're exposed to that through passive indices, that's a risk that you at least have to know that you're taking on.”

Not all mega-cap tech should be treated the same. “Apple is a very different business to Nvidia. Tesla is a very different business to Meta, for instance,” Arnold said, warning against bundling them together.

Beyond the US, opportunities are broadening. “We don't have to go to the US to be exposed to some of these really exciting opportunities,” he said, pointing to opportunities across Europe and other regions outside the US.

For Australian investors, the outlook for rates is more challenging. Mullins expects further tightening. “The IMF actually pointed to Australia and singled us out for having persistently high inflation,” he said. “Employment's going gangbusters.”

That is negative for the front end of the bond curve, but the long end offers relative value. “We have a very positively sloped yield curve in Australia, the best in the developed world,” Mullins said.

From noise to opportunity

Taken together, Mullins and Arnold’s message is less about forecasting the next shock and more about adapting to an environment that behaves differently to the one investors grew used to after the GFC. 

With volatility more persistent, correlations less reliable and outcomes increasingly uneven, the case for broad, passive exposure looks weaker than it once did. In its place, they argue, is a market that rewards selectivity, discipline and a willingness to look past the noise, not despite volatility, but because of it.