A couple of months ago, warning about a bubble in the world’s most important stock market was largely the preserve of oddballs and attention-seekers. Uttering the B-word is the financial markets equivalent of shouting “fire” in a crowded cinema, and it is generally used sparingly.
But as with so many aspects of life in 2025, it turns out you can get used to pretty much anything. And all of a sudden, the warnings are coming from all sides. The whole point of financial stability reports is to warn about stuff that might go wrong in the future but probably won’t. Even so, the latest missive from the IMF last week was bracing.
“Valuation models show risk asset prices well above fundamentals, raising the risk of sharp corrections,” it said. “Markets appear complacent as the ground shifts.” Investors and policymakers should be alert to the prospect of “disorderly” corrections and the potential for self-reinforcing doom loops, where a loss of confidence in the sustainability of government debt whacks the bond market, which in turn whacks risky assets priced for nirvana, which in turn hammers the banking sector, both traditional lenders and shadow banks that are locked in an embrace of “increasing interconnectedness”. The Bank of England struck a similar tone, noting the risk of a “sharp market correction”.