Equity Markets Run on Trust, not Confidence

If you’ve been investing for a while, this probably won’t sound radical: equity markets aren’t just discounting earnings. They’re discounting a whole set of assumptions that rarely get written down. Assumptions about institutions, behaviour and continuity.

Most of the time, they sit quietly in the background: they’re not in the model, or the asset allocation deck, they’re just there. When they hold, markets feel almost dull in hindsight - sensible, even.

When they don’t, things come apart far quicker than any spreadsheet can adjust.

At its heart, equity investing is an act of trust. But this isn’t trust in individual companies - you already know how fragile that can be - but trust in the system that makes ownership meaningful in the first place.

Courts that work, regulators that act and central banks that don’t surprise you for the sake of it. No one is pretending policy is perfect, but predictability still matters.

It’s dull machinery, and like most dull machinery, you only really notice it's there when it starts making strange noises.

 

When markets move before the data does

You’ve probably lived through this already: markets fall, not because earnings collapse, but because something feels off.

A policy announcement that lands badly, a fiscal move that feels rushed or maybe a central bank forced into a credibility test it didn’t ask for.

Nothing technically “breaks” in those moments:

· Contracts still exist

· Companies still trade

· Cash still flows

Yet valuations reset, sometimes violently, just when we least expect them.

Investors aren’t reacting to numbers; they’re reacting to whether they still trust the system producing those numbers. Are those foundations of yesteryear still believable?

This distinction matters more than it gets credit for. Volatility driven by fundamentals tends to be cyclical. It comes and goes. Volatility driven by institutional trust is structural; it changes behaviour and pricing, and it rarely reverses neatly.

 

Equity as a conditional ownership claim

We talk about equities as ownership, but that ownership is conditional; it always has been.

Equities aren’t absolute claims on future cash flows. They are claims that only hold if a chain of assumptions remains intact:

· From courts, to regulators, to central banks, to governments themselves

When that chain weakens, equity risk doesn’t reprice slowly; it gaps.

This is why experienced investors often feel stress in markets before it shows up in earnings forecasts. Something shifts in the background. This could be:

· a change in tone

· a political shortcut

· a framework stretched just a bit too far

You can’t model it cleanly, you can’t always put your finger on it, but if you’ve been around long enough, you recognise it almost immediately.

 

Why does experienced capital react differently?

When institutional trust is strong, markets reward patience. Duration works, growth narratives can run, and even passive exposure does what it says on the tin. You can afford to let compounding do its thing in the hope/knowledge that valuations will continue to rise.

However, as trust becomes less predictable, the market's personality changes.

· Multiples compress before earnings disappoint

· Liquidity starts to matter more than story

· Jurisdiction begins to matter more than sector

In this moment, the question quietly shifts from:

How fast can this grow?

to

How confident am I that this will actually turn into something I can control?

This isn’t panic but a simple market adjustment - something the financial markets have perfected over the centuries.

As you will know, sophisticated investors don’t usually abandon equities altogether. Instead, they look to reshape their exposure - leaning towards businesses with real pricing power, visible cash flows, and operating environments where the rules aren’t rewritten overnight. Otherwise referred to as safe-haven or defensive stocks.

 

Time horizons change the conversation

Family offices and long-term pools of capital see this differently because their time horizons force them to do so. Short-term drawdowns are noise - they always have been - but erosion of institutional trust is a signal.

Over decades, returns aren’t shaped by quarterly volatility nearly as much as by whether systems remain investable. That’s not theoretical; it’s lived experience, and history is full of markets that delivered strong nominal returns while quietly diluting real ownership.

This is why conversations at this level drift away from asset classes towards regimes: legal, monetary, and political incentives. It’s why diversification, in practice, becomes less about the number of holdings and more about where and under what rules capital is exposed.

 

A quieter way of thinking about equity risk

None of this is an argument for pessimism, because equities remain one of the most powerful tools for building long-term wealth. But they work best when the invisible infrastructure beneath them is stable, and when investors are honest with themselves about the assumptions they’re making.

For experienced investors, the real question isn’t whether equities will perform. It’s more about under which conditions they deserve capital, how quickly those conditions can change and the ultimate end game, the impact on investments, assets and returns.

That’s not a reason to retreat, but it is a reason to stay awake

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