If one word could define the biggest risk to the global economy right now, it would be “stretched,” according to a new report from a leading financial institution. The analysis repeatedly uses this term to describe financial markets, warning that valuations have been pushed to a precarious, unsustainable level.
The report identifies “stretched valuations” in stock markets as a primary source of concern, suggesting that a painful “correction” is a distinct possibility. This risk is particularly acute in the technology sector, where investor enthusiasm for generative AI has inflated prices to potentially dangerous heights.
The danger, the report explains, is that this stretched financial system is propping up the real economy. Investment related to AI has been a “significant contributor to investment growth recently.” If the stretched market snaps back, it will cause a “rather sharp” decline in the real-world investment that has been driving growth.
This financial risk exists even as the global economy shows “unexpected resilience,” with the 2025 growth forecast upgraded to 3.2%. However, the report implies that this resilience is itself stretched thin, based on temporary factors like a pre-tariff buying spree that are now fading.
For policymakers, from the Federal Reserve to the Bank of England, the message is that the system has been stretched to its limits. This adds another powerful reason for the “very cautious” approach to monetary policy that the report advocates, as any sudden move could be the one that causes the stretched system to break.