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Investing.com -- Despite equities recently reaching all-time highs, Deutsche Bank (ETR:DBKGn) warns that several risks could disrupt the rally, particularly if economic or geopolitical conditions shift.
In a note Monday, the bank outlined six potential threats that could weigh on markets.
One major risk is the lagged effects of past rate hikes, which could eventually pressure growth and expose vulnerabilities.
Deutsche Bank wrote, “When central banks started hiking aggressively in 2022, fears about the outlook for 2023 and 2024 were widespread.”
While risks tied to unrealized losses on balance sheets have diminished, the firm adds that any further surprises from rate-sensitive sectors could trigger renewed concerns.
A second concern is said to be higher inflation or borrowing costs eroding risk asset performance. For instance, the S&P 500 experienced a correction in late 2023 when inflation proved sticky, and the 10-year Treasury yield surpassed 5%. However, the bank highlighted that markets seem more accustomed to these higher rates now, which has tempered alarm.
Deutsche Bank also points to geopolitical risks and economic data surprises as potential catalysts for selloffs.
Geopolitical shocks, such as Russia’s invasion of Ukraine or recent Middle East tensions, have previously triggered market volatility, notes Deutsche Bank. On the economic side, they state that a sudden downturn in data, similar to last summer, could amplify fears of a slowdown.
Another emerging issue is AI-driven volatility, with skepticism growing around AI-related capital expenditure following DeepSeek’s cost-efficient model release. This has raised questions about the sustainability of valuations for tech leaders like the Magnificent 7.
While Deutsche Bank acknowledges these risks, it emphasizes that markets remain fundamentally strong, with tight credit spreads and easing monetary policy lags providing positive tailwinds.
“Despite this morning’s selloff, it’s worth remembering that risk assets look in a relatively strong position right now, all things considered,” said the bank.