When a Bank of England deputy governor starts warning that stock markets are overvalued, it’s probably worth putting down your coffee and paying attention.
Clare Lombardelli, one of the Bank’s deputy governors, has broken with the usual careful diplomacy of Threadneedle Street to say, quite plainly, that she believes global equity markets are priced too high and could be heading for a fall. It’s the kind of blunt assessment that senior figures at the Bank rarely make in public, and financial circles have taken note.
Her concern centres on the gap between current market valuations and the underlying economic reality. With interest rates still elevated and global growth looking fragile, the argument is that share prices, particularly in the US, are reflecting a level of optimism that the fundamentals simply don’t support.
“Asset prices in some markets appear stretched relative to historical norms,” Lombardelli indicated, pointing to the risk that a sharp correction could ripple through the broader financial system.
The S&P 500, Wall Street’s main index, has climbed sharply over the past two years, powered largely by enthusiasm around artificial intelligence and a handful of mega-cap technology stocks. At current levels, it’s trading at a price-to-earnings ratio well above its long-run average, a metric that has historically preceded periods of poor returns.
For ordinary savers and pension holders in the UK, this matters more than it might seem. A significant chunk of British workplace pension funds holds international equities, many of them in the US. A sharp correction in American markets wouldn’t stay neatly on the other side of the Atlantic.
It’s unusual for a Bank official to be this forthright. The standard line tends toward careful hedging, acknowledging “risks” without naming them too loudly. Lombardelli’s comments suggest the Bank is genuinely uneasy, even if it stops well short of predicting exactly when, or how badly, things might unwind.
Markets have shrugged off similar warnings before, of course. They did it in 2021, and in 2023. But each time the correction eventually comes, people are surprised anyway.
The question worth sitting with is simple enough: if one of the people paid to watch for financial trouble is sounding the alarm, how long before investors actually listen?
