The report finds that financial markets have largely shrugged off shocks from the April 2025 US tariff announcements, with risk assets rallying and volatility subsiding. However, IMF models show that asset valuations—particularly in equities and corporate credit—are stretched well above fundamentals, increasing the risk of disorderly corrections if adverse shocks occur.
The US dollar has depreciated by 10 percent year to date, reflecting investor reassessment of its long-standing strength and growing hedging activity. Meanwhile, sovereign bond yields have risen across advanced economies, driven by expanding fiscal deficits and reduced demand from long-duration investors.
Debt and nonbank risks on the rise
The report highlights mounting pressure from widening fiscal deficits, especially in advanced economies, where sovereign bond markets are increasingly reliant on price-sensitive investors. Stress tests show that abrupt yield increases could strain bank balance sheets and liquidity at open-ended funds.
Nonbank financial intermediaries (NBFIs)—including stablecoins and private credit funds—continue to grow and deepen their ties with banks. The IMF warns that this interconnectedness could amplify shocks, particularly as maturity mismatches and leverage rise across the financial system.
For equity markets, the report notes that they have rebounded sharply, led by mega-cap technology and AI-related stocks—the so-called “Magnificent Seven.”
These firms now account for 33 percent of the S&P 500, raising concentration risks to historic highs. Analysts have revised down profit margin expectations for most sectors, except the Magnificent Seven, suggesting potential vulnerabilities if these firms fail to meet lofty earnings expectations.
Emerging markets: Relief and caution
Emerging markets have benefited from a weaker dollar and subdued energy prices, easing external financing pressures, according to the report.
However, the IMF notes that stretched valuations and high debt burdens in some economies could heighten vulnerability to trade and geopolitical shocks. Investors remain cautious—particularly toward lower-rated sovereigns—as reflected in currency option markets and widening swap spreads.
Despite easier financial conditions, the IMF’s growth-at-risk metric shows that the probability of global growth falling below 2 percent remains high. The one-year-ahead forecast suggests a 5 percent chance of growth dipping below 0.5 percent, underscoring persistent downside risks.
Policy recommendations
To mitigate these risks, the IMF urges policymakers to preserve central bank independence, remain vigilant on inflation, rein in fiscal deficits, implement prudent regulatory standards, strengthen oversight of NBFIs and stablecoins, and enhance financial-sector safety nets and transparency in sovereign borrowing.
The report concludes that while markets appear calm, the underlying financial terrain is shifting—and without coordinated policy action, the risks could intensify.
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