Over the past fortnight global equity markets have experienced a sharp and synchronised pullback. This week has added an important nuance. After the initial aggressive selloff, markets have not collapsed further, instead they have begun to oscillate. Large intra-day moves, sector rotations, and short bursts of recovery have replaced the one-way decline. That behaviour matters.

When markets fall in a straight line, the driver is usually positioning and forced selling. When they begin to swing violently in both directions, the market is no longer trying to find sellers, it is trying to find a price. Understanding the difference is critical because it tells us whether we are entering a deteriorating economic regime or simply adjusting to a new valuation framework.

At present, the evidence points strongly to the latter.

The Real Trigger: A Discount Rate Shock

The cleanest explanation for the recent market move is not earnings deterioration, geopolitical headlines, or even recession fears. It is the repricing of the discount rate.

Coming into the year, markets were positioned for a relatively comfortable environment. Inflation gradually cooling, central banks preparing to ease, growth remaining resilient, and investment in technology infrastructure continuing. That combination supports higher valuation multiples, particularly for growth and long-duration equities.

Over the past two weeks bond markets shifted that assumption. The expected path of interest rates moved slightly higher and further out. Not dramatically, but enough to change valuation mathematics.

Equities represent future cash flows discounted back to today. When the hurdle rate rises, even modestly, the present value of those future earnings falls.

The sequence we observed followed the textbook pattern:

-Long duration technology weakened first
-High multiple growth followed
-Small caps lost sponsorship
-Broader indices eventually reacted

This is the signature of a valuation adjustment rather than an earnings collapse.

Why This Move Felt So Fast

Fundamentals rarely change in days. Positioning does. Entering 2026, investor exposure was concentrated in a handful of consensus themes: large cap growth, artificial intelligence infrastructure beneficiaries, and a broad expectation of small cap recovery. Many strategies were carrying leverage, both explicit and implicit.

When interest rate expectations shifted, selling did not occur gradually. Risk models forced it. Volatility targeting strategies reduced exposure. Leveraged portfolios cut positions. Systematic funds de-risked simultaneously. The market temporarily became flow-driven rather than information-driven.

This is why the selloff appeared indiscriminate across sectors and geographies. The market was not reacting to new economic damage. It was adjusting crowded positioning to a slightly different macro assumption.

Why Rising Yields Matter More Today

Not all rising yields are negative for equities. In a healthy expansion yields rise because growth strengthens. Today the concern is different. Markets are beginning to accept that interest rates may not return to the extremely low levels experienced over the past decade. Several forces are reinforcing this idea:

-Inflation falling but gradually (arguable)
-Persistent fiscal deficits increasing bond supply
-Central banks maintaining policy flexibility rather than emergency easing
-A higher estimate of neutral policy rates

The implication is subtle but powerful. Valuations across asset classes may need to anchor to a structurally higher discount rate. In that environment even strong businesses can decline in price without any change to their long term outlook.

Liquidity Is Quietly Tightening

Behind the scenes, liquidity conditions have also shifted. Large government bond issuance absorbs capital that previously flowed into risk assets. Quantitative tightening removes marginal support from financial markets. Funding adjustments ripple through leveraged strategies.

Liquidity does not need to collapse to matter. It only needs to move from supportive to neutral. That transition alone is enough to compress valuations.

What This Is Not

Importantly, current market behaviour does not yet resemble a systemic crisis.

-We are not seeing widespread banking stress.
-Credit markets remain orderly.
-Earnings downgrades are limited.

Those characteristics define recessions and financial crises. Instead we are seeing a repricing correction, painful but fundamentally different. The distinction matters because valuation corrections recover differently from economic contractions. They typically stabilise once rates stabilise, not when growth reaccelerates.

Why This Week’s Price Action Matters

This week markets stopped falling in unison and began trading both directions. That shift suggests forced selling is moderating. The market is transitioning from liquidation to price discovery. Typically the sequence follows this pathway: First there is a sharp decline driven by flows, a volatile consolidation and then a gradual differentiation between companies

We appear to be entering the third phase. When markets begin rewarding balance sheet strength and earnings visibility even while indices remain unsettled, the foundation of recovery is forming beneath the surface.

The Australian Context

Australian equities often react with a slight delay to global interest rate volatility. The marginal buyer is international capital while domestic superannuation flows rebalance more slowly. Small and mid caps sit directly at the intersection of those forces. When global funds de-risk, liquidity contracts quickly. When stability returns, the rebound is equally sharp. Technology and SaaS companies feel this most acutely because they behave like long duration assets. Their valuations depend more on future growth assumptions than immediate cash flows. This explains why share prices can fall despite unchanged company performance. The valuation multiple changes, not the business.

What Historically Signals the Turn

Markets rarely wait for central banks to actually cut rates before turning. Instead, they tend to stabilise once interest rate volatility stops rising. Historically the sequence is consistent: bond yields peak and stop drifting higher, valuation compression comes to an end, high-quality growth companies begin to steady, and broader market participation gradually returns. Importantly, this recovery phase usually starts while economic news still feels uncertain rather than obviously improving.

What This Means For Investors

The current environment is uncomfortable but informative because it separates price volatility from genuine business deterioration. Periods like this tend to reward companies with strong balance sheets, predictable cash flows, durable demand, and disciplined capital allocation, while penalising businesses valued purely on distant expectations. Importantly, forced selling often creates temporary mispricing in companies whose long term outlook has not changed, and historically this is where long term investors have added the most value.

Tamim Takeaway

The recent market weakness appears driven primarily by valuation adjustment rather than economic damage. Interest rate expectations moved, positioning unwound, and liquidity tightened marginally.

This week’s stabilisation suggests markets are transitioning from forced selling toward price discovery.

Corrections caused by discount rate repricing tend to end when rates stabilise, not when economic growth accelerates. As volatility subsides, quality businesses typically recover first, followed by broader market participation.

Periods where prices move faster than fundamentals rarely persist. They instead create opportunities for patient capital prepared to distinguish between temporary valuation compression and permanent impairment.