US stock markets which have rallied during the AI boom are at risk of a \u201csudden, sharp correction\u201d while government bond markets are under mounting pressure, the International Monetary Fund has warned.<\/p>\n
In its Global Financial Stability Report, published as policymakers gather in Washington for the IMF\u2019s annual meetings, the Fund said that markets appear \u201ccomplacent\u201d.<\/p>\n
It highlighted \u201cincreasing vulnerabilities in the financial system,\u201d including in stock and bond markets, and among \u201cnon-bank financial intermediaries\u201d (NBFIs) or \u201cshadow banks\u201d, which it warned are now closely bound to the banking sector.<\/p>\n
US stock markets have repeatedly roared to record highs in recent months. The IMF said stocks do not appear as overvalued as they did during the dotcom bubble at the turn of the millennium<\/a>. But it said the gains are worryingly concentrated among the \u201cmagnificent seven\u201d tech firms<\/a>, which include Apple, Nvidia and Meta.<\/p>\n \u201cConcentration risk within the S&P 500 is at a historic high, with a narrow group of stocks spanning mega-cap IT and AI-related firms driving the broader index,\u201d it said, adding that the magnificent seven account for 33% of the index.<\/p>\n It warned \u201cthe possibility of mega-cap stocks failing to generate expected returns to justify current lofty equity valuations could trigger deterioration in investor sentiment and make the stocks susceptible to sudden, sharp correction,\u201d adding, \u201cvaluations would collapse as a result, making the broader benchmark index vulnerable to downturns.\u201d<\/p>\n The Fund also expressed concern about the stability of government bond markets, with many countries expanding borrowing significantly, and increasingly dependent on \u201cprice-sensitive investors\u201d, rather than domestic pension funds, for example.<\/p>\n Analysing recent trends in these markets, including shifts in yields, which move inversely to prices, the IMF suggested they may be \u201con shakier footing than they seem\u201d.<\/p>\n The IMF said stress in the markets for leading governments\u2019 bonds remains unlikely \u2013 a \u201ctail risk\u201d \u2013 but would have \u201cbroad and disruptive ramifications for financial markets, given bonds\u2019 role as key benchmarks and collateral\u201d.<\/p>\n The Fund renewed its warnings about the burgeoning growth of NBFIs in the global economy. These lenders, which face less onerous capital requirements than traditional banks, have expanded rapidly in recent years. The IMF pointed to the fact that mainstream banks are increasingly lending to NBFIs, raising the risks of a systemic crisis if they began to struggle.<\/p>\n \u201cBanks\u2019 growing exposures to NBFIs mean that adverse developments at these institutions \u2013 such as downgrades or falling collateral values \u2013 could significantly affect banks\u2019 capital ratios,\u201d the IMF said. It added that the sector should be better regulated: \u201cThe growing importance of NBFIs in financial intermediation highlights the need for sound oversight of this segment.\u201d<\/p>\n skip past newsletter promotion<\/a><\/p>\n Sign up to Business Today<\/p>\n Get set for the working day \u2013 we’ll point you to all the business news and analysis you need every morning<\/p>\n Privacy Notice: <\/strong>Newsletters may contain information about charities, online ads, and content funded by outside parties. If you do not have an account, we will create a guest account for you on theguardian.com<\/a> to send you this newsletter. You can complete full registration at any time. For more information about how we use your data see our Privacy Policy<\/a>. We use Google reCaptcha to protect our website and the Google Privacy Policy<\/a> and Terms of Service<\/a> apply.<\/p>\n after newsletter promotion<\/p>\n