The Bank of England has issued an unusually direct warning that global stock markets are overvalued and fail to reflect the risks building in the world economy, with the deputy governor for financial stability, Sarah Breeden, saying she expects a “sharp adjustment” at some point. In an interview published on Friday, Breeden told the BBC that “a lot of risk” was present alongside record-high asset prices, describing a scenario in which multiple threats — including a major macroeconomic shock, a loss of confidence in private credit markets and a correction in highly valued artificial intelligence stocks — could crystallise at once. “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?” she said, adding that her role was not to predict the timing but to ensure the financial system is resilient.
Private credit and risky valuations: the core of the warning
Breeden reserved particular concern for private credit markets, which have ballooned to an estimated $2 trillion globally — or $3.5 trillion within the broader shadow banking sector — and have never been tested at this scale with their current complexity and interconnections. She warned of a “private credit crunch, rather than a banking-driven credit crunch,” noting that the market operates with limited transparency, infrequent valuations that may be based on manager estimates, and a dangerous liquidity mismatch: funds hold long-term, illiquid assets while offering investors short-term withdrawal windows. Some private credit funds have already been forced to “gate” withdrawals after suffering losses, intensifying fears about vulnerabilities in the financial system. Regulators including the International Monetary Fund and the Federal Reserve have flagged building risks in non-bank lending, and a UK House of Lords report concluded that data is insufficient even to determine whether private credit poses a systemic threat, labelling it an “unknown unknown.” Breeden said the thing that “really keeps me awake at night” is the chance that several of these risks hit simultaneously — a macroeconomic shock, a collapse in confidence in private credit, and a readjustment of AI and other risky valuations — and whether the system is prepared.
The Bank of England’s Financial Policy Committee has already identified sovereign debt markets, private credit markets and corrections to AI equity valuations as the three main sources of stability risk. In late March the Bank warned that valuations were “particularly stretched” for US technology companies focused on AI, and that investor sentiment relating to risky credit markets had deteriorated even before the conflict in the Middle East began. The massive investment in AI infrastructure has drawn comparisons to the dot-com bubble, and Google searches for “AI bubble” have surged to levels last seen before the US housing market crash in 2006. While some industry figures, such as Nvidia’s Jensen Huang, have dismissed bubble fears, concerns persist about whether AI will deliver results fast enough to justify current spending and valuations — with some reports suggesting organisations are getting “zero return” on significant enterprise investment in generative AI. There are also questions about circular financing that could artificially boost valuations, although some analysts argue that is not currently happening.
Geopolitical backdrop and market reaction
The warning comes against the backdrop of the Iran war, which has been described as sparking the largest energy shock in history. The conflict has disrupted global oil and gas supplies, driven up inflation, weakened growth and increased borrowing costs. The Strait of Hormuz, a critical shipping route, remains effectively closed, tightening energy supply. The IMF has warned that a further escalation could trigger a global recession, with the UK expected to be particularly affected. The war has already unsettled financial markets, leading to stock price declines, rising bond yields and increased volatility.
Breeden’s intervention itself appeared to move markets. The FTSE 100 fell by nearly 0.5% on Friday after her interview was published, closing at 10,411 points. The index now sits about 5% below the record high it reached in late February, just before the Iran war began. Russ Mould, investment director at AJ Bell, said it is “unusual for a Bank of England official to explicitly warn about a potential stock market pullback,” and that her comment “might have contributed to some of the FTSE 100’s decline on Friday.” He noted that Breeden was not merely referring to Middle East events but also to private credit, high equity valuations and AI. Simon French, chief economist at Panmure Liberum, suggested it “might be seen as suboptimal” that the warning came in a week the UK government launched a push to get British savers to invest in the financial markets.
Despite the caution, markets have shown resilience, with some investors betting on a swift resolution to geopolitical tensions and a retreat in energy prices. The US stock market hit a record high earlier this week, and Japan’s Nikkei 225 ended the day at a record closing high, lifted by a rally in technology stocks after chipmaker Intel beat forecasts. Breeden, who joined the Bank of England in 1991 and has held senior roles including executive director for financial stability strategy and risk, stressed that the Bank’s Financial Policy Committee is focused on building resilience. The Bank has implemented reforms following the 2022 gilt market stress and has concentrated on strengthening ex ante resilience in areas such as gilt-repo markets. Meanwhile, the Bank is expected to hold interest rates steady in the near term, despite inflation threats, with some Monetary Policy Committee members considering rate hikes and others advocating a wait-and-see approach. Breeden, who sits on both the MPC and the FPC, made clear that her job was not to predict a crash but to ensure the system can withstand one. “I’m not saying it will happen today, tomorrow, in 12 months’ time. It’s ensuring that if it happens the system is resilient.”
