Global stock markets may be heading toward a correction even as they trade near record highs, a senior Bank of England official warned.
Sarah Breeden, deputy governor for financial stability at the Bank of England, warned that global equities appear overstretched and vulnerable to a downturn, noting that markets are not adequately pricing in macroeconomic threats, CNBC reported.
"There's a lot of risk out there and yet asset prices are at all-time highs," Breeden told CNBC, adding that "we expect there will be an adjustment at some point.''
Breeden also cautioned about the possibility of multiple risks hitting the markets simultaneously, including a broader macroeconomic shock, weakening confidence in private credit markets, and a reassessment of high-growth sectors such as artificial intelligence.
Her comments come as global equities remain resilient despite the ongoing U.S.-Iran conflict. While the war has fueled volatility and uncertainty, major U.S. indexes have continued to climb, with the S&P 500 and Nasdaq Composite reaching new record highs this week after recovering earlier losses linked to the conflict.
That resilience has been supported by strong corporate earnings and investor demand for technology stocks, even as geopolitical risks persist. Global markets have rebounded from earlier war-driven losses and remain close to record highs despite ongoing tensions, Reuters noted.
However, concerns are building beneath the surface of the rally. Breeden highlighted the rapid expansion of the private credit market, now estimated at around $2.5 trillion, as a key vulnerability, warning that it has yet to be tested under severe stress conditions and could trigger a "private credit crunch" if defaults rise or investor confidence falters, CNBC reported.
Wider concerns about the sector have also been flagged by other analysts, with rising borrowing costs and economic uncertainty beginning to strain borrowers and increase the risk of defaults and liquidity pressures, the Financial Times reported.
Geopolitical tensions continue to add another layer of uncertainty. The conflict involving Iran has contributed to fluctuations in global oil prices, with energy markets reacting sharply to developments in the Middle East and raising concerns about inflation and economic growth, Al Jazeera reported.
Despite these risks, some investors remain focused on underlying economic strength. UBS Global Wealth Management has maintained that, in the absence of a prolonged shock, corporate earnings and broader economic conditions continue to support equities, CNBC reported.
Still, questions remain about the sustainability of current valuations. Market observers have pointed to similarities with previous periods of market exuberance, including the late 1990s tech boom, when warnings about inflated valuations preceded a major downturn.
Artificial intelligence-driven stocks have played a central role in powering recent gains, contributing to concerns about market concentration and whether valuations are justified by long-term earnings potential, Bloomberg reported.
Breeden also stressed that the key concern is not just individual threats, but the possibility of several shocks unfolding at once and testing the resilience of the financial system.
