The Bank of England's deputy governor has issued a stark warning that global stock markets are poised for a fall, with near-record valuations deemed unsustainable. Sarah Breeden, the BoE's head of financial stability, told reporters that the central bank anticipates an "adjustment at some point" as markets hover near all-time highs.
Unsustainable Valuations
Both the UK's FTSE 100 and the US S&P 500 have been trading near record levels, driven by investor optimism about future corporate earnings. However, Breeden cautioned that these lofty valuations are not justified by the underlying economic risks. The FTSE 100 has surged over 24% in the past year, while the S&P 500 has gained more than 32% over the same period, despite ongoing geopolitical tensions.
"There's a lot of risk out there and yet asset prices are at all-time highs," Breeden said. "We expect there will be an adjustment at some point."
Geopolitical and Financial Risks
The BoE is particularly concerned about the confluence of multiple risks that could trigger a sharp market downturn. These include the ongoing wars in Iran and Ukraine, which are driving global inflation, and the rapid growth of private credit—loans provided by non-bank financial institutions—which has ballooned to $2.5 trillion over the past two decades.
"The thing that really keeps me awake at night is the likelihood of a number of risks crystallising at the same time – a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust - what happens in that environment and are we prepared for it?" Breeden added.
Private credit has not been tested at this scale, and a crunch in this sector could have severe repercussions for the broader financial system, potentially leading to a cascade of defaults and liquidity shortfalls.
Historical Context
The most recent major market crash occurred in 2020 due to the COVID-19 pandemic, which saw sharp declines followed by rapid recoveries. Since then, the US market experienced drops in 2022 and 2025, the latter triggered by former President Donald Trump's tariff announcements. A market crash is typically defined as a decline of 20% or more in a short period, though any significant drop can have ripple effects.
While a stock market fall does not always lead to a recession, it can impact businesses and investors. Companies listed on exchanges may see reduced access to capital, while investors—including those with pensions and ISAs—could face portfolio losses.
Impact on Investors and the Economy
For individuals invested in stocks and shares ISAs or pensions, a market downturn would reduce the value of their holdings. Financial experts generally advise against panic selling and recommend riding out downturns, as markets have historically recovered over the long term. However, those nearing retirement may be particularly vulnerable if their pension pots shrink at a critical time.
Dividend income from investments could also be cut or eliminated if firms choose to conserve cash, potentially reducing household spending. This, in turn, could lead to lower business revenues, hiring freezes, and a broader economic slowdown.
The UK government has been encouraging more people to invest in retail markets to build long-term wealth, but the BoE's warning underscores the need for resilience in the financial system.
Systemic Resilience
Breeden emphasized that the BoE is focused on ensuring the financial system can withstand a potential shock. "What we are watching for: is how might those prices fall? Will there be a sharp adjustment downwards? And if there is such an adjustment, how will that affect the economy? I'm not saying it will happen today, tomorrow, in 12 months' time. It's ensuring that if it happens the system is resilient," she said.
The deputy governor specifically highlighted the risks from private credit, which has grown rapidly without being tested under stress. "Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. It hasn't been tested at this scale with the degree of complexity and interconnections it has with the rest of the financial system so far. It's a private credit crunch, rather than a banking-driven credit crunch, that we're worried about," she added.
