Stock markets look expensive by almost any traditional measure. But what if expensive doesn't mean doomed?
That's the contrarian take from Schroders in its 2026 global equities outlook. Sure, the U.K.-based asset manager acknowledges that nearly all major markets are trading at multiples well above their 15-year medians. Classic long-term gauges like the cyclically adjusted price-to-earnings ratio and the market-cap-to-GDP measure—a favorite of Warren Buffett—are signaling danger ahead. Historically, these red flags have preceded mean reversion and painful corrections, Chief Investment Officer Alex Tedder notes in the report.
But here's the twist: this time might actually be different.
The Interest Rate Cushion
One factor working in markets' favor is monetary policy. Short-term interest rates are expected to decline across many countries, particularly in the United States, according to Tedder. Lower borrowing costs naturally support equity valuations because investors discount future earnings at cheaper rates. It's Finance 101, but it matters.
China's Quiet Revolution
The more interesting story, though, is what's happening beneath the surface in emerging and developed economies alike.
China's evolution into a genuine technology superpower stands out as a force that markets may be seriously underpricing. This isn't speculative—it's already playing out in electric vehicles, renewable energy, and robotics. These sectors are reshaping global competition in real time. As confidence builds in China's growth narrative, demand for assets connected to its tech sector could surge, offering investors diversified exposure while reinforcing strength across global equity markets.
"All the market dynamics we have noted here lead us to believe those elevated valuations are sustainable for the time being. Short-term interest rates in many countries are likely to fall, providing support to market multiples, specifically in the U.S.," Tedder wrote. "Structural factors, such as China's transition to becoming a technology giant (already evident in the electric vehicle, renewable energy and robotics sectors), are also probably being underestimated by the market."
Beyond China: India, Brazil, and Europe
Schroders doesn't stop with China. India and Brazil are also highlighted as economies where improving confidence could drive meaningful asset demand. Together with China, these markets represent a huge chunk of global growth potential. Their structural transformations could provide support for valuations that might otherwise look shaky.
Even Europe gets a mention. Schroders sees the region as undervalued relative to its long-term fundamentals, particularly around technology infrastructure and the energy transition. As these themes accelerate, they could justify higher multiples across European equities.
The Risk Factor
Of course, Schroders isn't ignoring the risks. Elevated valuations remain vulnerable if economic growth disappoints or geopolitical shocks shake investor confidence. But the firm's base case is that falling rates, improving sentiment in key emerging markets, and underappreciated structural drivers will keep valuations supported for now.
The bottom line? While bears warn that gravity always wins eventually, Schroders sees a world where China's tech ascent, Europe's energy transformation, and broader emerging-market resilience keep equity markets afloat. For investors, the takeaway is straightforward: expensive doesn't automatically mean unsustainable—especially when the fundamentals underneath are shifting in surprising ways.