Why Equity Markets Continue Rising Despite Persistent Uncertainty and Geopolitical Risks

The global equity market’s resilience in 2025, despite persistent geopolitical tensions and economic headwinds, reflects a complex interplay of investor psychology and policy tailwinds. While the S&P 500 is projected to close near 6,000 by year-end, driven by double-digit earnings growth [1], non-U.S. markets have surged even more sharply. The Hang Seng Index, for instance, has delivered 19.3% year-to-date returns, while the DAX 40 has gained 18.1% [4]. This divergence underscores a shift in investor behavior and policy dynamics that are outpacing traditional economic risks.

Investor Psychology: Overconfidence and Sentiment-Driven Momentum

Investor psychology has emerged as a critical force in sustaining equity market gains. Overconfidence among investors—defined as the tendency to overestimate information quality and underestimate risk—has fueled demand for risky assets, inflating valuations even amid uncertainty [4]. This behavioral bias is particularly pronounced in non-U.S. markets, where investors are reallocating capital as the U.S. dollar weakens against both developed and emerging market currencies [3]. The U.S. dollar’s 10% decline against developed market peers and 7% drop against emerging market currencies in the first half of 2025 have made non-U.S. equities more attractive, compounding the appeal of markets like Japan and Korea, where “value up” trends prioritize shareholder returns [3].

Sentiment metrics further reinforce this narrative. The Yale School of Management’s One-Year Confidence Index, which measures investor expectations for the Dow’s performance, has remained elevated, reflecting optimism about corporate earnings and policy stability [5]. However, this optimism is tempered by muted euphoria, as net fund inflows in 2024 totaled just $100 billion—far below the $1.2 trillion seen in 2021 [1]. This suggests a cautious, yet persistent, appetite for risk, with investors balancing geopolitical concerns against the allure of higher returns in undervalued sectors.

Policy Tailwinds: Central Banks and Fiscal Stimulus as Stabilizers

Central bank interventions have also played a pivotal role in sustaining equity markets. In the Asia-Pacific region, central banks have aggressively cut interest rates in response to moderating inflation and trade policy uncertainties. The Reserve Bank of Australia, for example, initiated a rate-cutting cycle to support growth amid U.S. tariff-related volatility [1]. Similarly, Hong Kong’s Monetary Authority intervened to stabilize the USD peg, mitigating capital outflows and preserving market confidence [1].

In Europe, the European Central Bank (ECB) has adopted a cautious stance, balancing the need to protect price stability against the risks of trade-related shocks. The ECB’s response to U.S. tariff announcements in April 2025—a period marked by a sharp sell-off in riskier assets—highlighted its role as a stabilizer. While the ECB initially tightened policy to curb inflation, it later paused tariffs for 90 days, allowing markets to recover partially [2]. This data-dependent approach has reassured investors, who now view European equities as a safer haven compared to the U.S. market’s exposure to trade policy shifts [2].

The Tipping Point: Psychology and Policy Outpacing Economic Headwinds

The interplay between investor psychology and policy tailwinds has created a self-reinforcing cycle. Overconfidence and sentiment-driven buying have pushed valuations higher, while central bank interventions have provided liquidity and stability. This dynamic has outpaced economic headwinds, including the 40% probability of a U.S. recession in the second half of 2025 [1] and slowing growth in emerging markets [1].

For instance, the U.S. equity market’s valuation risks—exacerbated by slashed earnings forecasts—have been offset by policy-driven optimism. The Federal Reserve’s accommodative stance, despite trade tensions, has cushioned the goods economy and household purchasing power, creating a buffer against recession [5]. Meanwhile, non-U.S. markets have benefited from a “value up” shift, with sectors like financials and industrials outperforming growth stocks [2].

Conclusion

Equity markets in 2025 are rising not despite, but because of, the confluence of investor psychology and policy tailwinds. Overconfidence and sentiment metrics have driven capital toward undervalued assets, while central bank interventions have mitigated the fallout from geopolitical risks. As the year progresses, investors must remain vigilant: while these forces currently outpace economic headwinds, a shift in sentiment or policy could quickly reverse the trend. The key lies in balancing optimism with prudence—a lesson history has repeatedly shown is critical in volatile markets.

Source:
[1] Mid-year market outlook 2025 | J.P. Morgan Research [https://www.jpmorgan.com/insights/global-research/outlook/mid-year-outlook]
[2] Equity Market Outlook | BlackRock [https://www.blackrock.com/us/individual/insights/equity-market-outlook]
[3] Global Equity Views 3Q 2025 [https://am.jpmorgan.com/us/en/asset-management/adv/insights/portfolio-insights/asset-class-views/equity/]
[4] Investor psychology in the stock market: An empirical study [https://www.sciencedirect.com/science/article/pii/S2214845022000813]
[5] United States Stock Market Confidence Indices [https://som.yale.edu/centers/international-center-for-finance/data/stock-market-confidence-indices/united-states]