The Bank of England’s (BoE) deputy governor has warned of a fall in global stock markets, saying near-record valuations are unsustainable.

Both the UK and US stock markets are sitting near all-time highs due to investors continuing to bet on big future earnings, but Sarah Breeden said the bank expects an “adjustment at some point”.

The BoE appears concerned about the stability of financial systems if a market drop occurs in conjunction with other issues, including the Iran and Ukraine wars that are driving up inflation globally and private credit, which has grown exponentially and is provided by private firms, not banks. There are some worries that it may become a more widespread problem if the companies that have borrowed that money are unable to pay it back, which in turn could lead to shortfalls for their backers.

Ms Breeden said: “There’s a lot of risk out there and yet asset prices are at all-time highs. We expect there will be an adjustment at some point.

“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?”

The most recent significant market crash was in 2020 as a result of the Covid pandemic, which saw steep drops in most markets but also very swift rebounds. Since then, the US market in particular suffered drops in 2022 and 2025, the latter after Donald Trump first announced his plan to slap tariffs on trading partners around the world.

Stock market falls happen when share prices of multiple companies drop in tandem after being sold off in large amounts. There’s no specific amount a market has to drop to be termed a “crash”, though 20 per cent or more in a short period of time is usually considered one.

While a falling or even crashing stock market will not always lead to an economic decline or recession, there is a knock-on effect on both the businesses on the market and those who invest in them.

London’s major index, the FTSE 100, is up 5.2 per cent this year so far despite the impending economic hit to the UK and the rest of the world over oil prices, while across the past year it is up 24.4 per cent. Adding to the lack of absolute correlation is the globalisation of many businesses within the FTSE indices and the fact that they operate in markets outside the UK economy.

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In the US, the S&P 500 is up 3.8 per cent for the year and 32.2 per cent over a year, having hit a new all-time high earlier this week despite the Iran war. The six biggest public companies in the world – led by Nvidia, Alphabet and Apple – and 10 of the top 12, are listed in the US.

That said, impacts arise from such huge companies taking a dive in share price.

What does it mean for your money?

For those invested in the market, either through stocks and shares ISAs or pensions, their portfolios would drop in value.

In theory, that is not a problem unless assets were sold at that lower valuation point. Most experts recommend riding out market downturns or else continuing to cost-average purchase, regardless of price, instead of panic selling. When markets return to upward, those downturns are actually when the greatest returns tend to be made, when assessed over the long term. There is no definitive timeframe for when markets recover from even the deepest downturns, but historically, they always have done so. The UK government is encouraging more British people to take up retail investing to boost their long-term wealth.

The other issue is if pensions drop in value at a moment when someone is close to retirement, which would mean their pot is worth less right when they need it most. This makes it important for people to be aware of their overall financial picture, the closer they get to that point in their lives.

For those who receive dividend income from investments – firms that pay out a portion of their profits to shareholders – this could be reduced or cut off entirely if businesses decide they need to reallocate money, which could in turn see households reduce their spending.

When large numbers of people do that, it naturally has an economic knock-on impact, with lower spending meaning less income for businesses. That could then mean they decide not to hire as many people or invest in projects, meaning potentially fewer jobs on the market.

For firms on the stock markets, a falling share price could mean less cash available for reinvestment into the business and a lowered ability to borrow. If there are stock-price-linked obligations, that can create wider problems for the business and naturally, consumer confidence can double down on such issues.

Rather than stock market worries around what that directly means for people, the BoE appears to harbour concerns about wider resilience to such shocks.

“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,” Ms Breeden, the BoE’s head of financial stability, added.

“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.”