'Sharper market corrections': What Economic Survey says on prolonged periods of uncertainty

The Economic Survey 2026, tabled on Thursday, which described 2025 as a year marked by heightened uncertainty, said the impact of uncertainty on financial markets is not limited to higher volatility and risk premia. Citing research, the survey said prolonged periods of uncertainty could affect the financial sector through at least three key channels.

First, the survey said financial market participants tend to defer decisions in the presence of uncertainty, adding that a rise in uncertainty triggered a “wait-and-see” sentiment that delayed investments.

Second, it noted that heightened uncertainty raise the cost of finance through an increase in credit spreads and financial intermediation costs.

“In turn, this can impact the real economy by impeding the flow of credit. Finally, prolonged uncertainty can increase the possibility of sharper market corrections across asset classes. In some cases, these market corrections can pave the way for financial contagion, spreading to the entire financial sector and the real economy,” the survey said.

The survey noted that financial markets are typically the first to register and absorb the impact of an uncertainty shock.

It also flagged emerging risks for global financial markets grappling with the introduction of new technologies such as artificial intelligence (AI).

Citing the International Monetary Fund’s Financial Stability Report of October 2025, the survey said there is a higher likelihood of herding behaviour in financial markets as global investors increasingly used similar AI models.

The IMF report, the survey said, also noted that compared with previous decades, investors had become more sensitive to micro-information signals transmitted through social media.

“These trends suggest the possibility of longer and more amplified shocks in global financial markets. Parallelly, technology stocks pose an emerging risk of inflated valuations, with AI-related stocks accounting for 75 per cent of S&P 500 returns, 80 per cent of earnings growth, and 90 per cent of capital spending growth since ChatGPT launched in November 2022,” the survey said.

It added that structural vulnerabilities, such as rising global government debt and aggressive risk-taking among non-bank financial institutions, remained capable of intensifying the effects of emerging shocks.