ESMA warns of abrupt market correction risk amid elevated valuations

Nicosia, Cyprus. The European Securities and Markets Authority has warned that elevated technology valuations and geopolitical tensions are increasing vulnerabilities in EU financial markets, despite their continued resilience.

Market vulnerabilities

ESMA said persistent inflation, weaker economic growth and heightened volatility were testing markets, while strong performance in technology and artificial intelligence-related sectors had restored investor optimism and valuations.

The regulator said resilience should not be interpreted as an absence of vulnerabilities. It warned that the widening gap between deteriorating macro-financial conditions and positive market valuations could lead to sudden corrections if economic risks materialise or investor sentiment shifts abruptly.

Investor warning

“Investor optimism continues to support elevated valuations despite rising geopolitical tensions and a weakening economic outlook. The wider this gap becomes, the greater the risk of an abrupt market correction,” ESMA chair Verena Ross said.

“Retail and institutional investors should remain vigilant and retain resilience, preparing to be able to withstand sharp market corrections,” she added.

Risk monitoring report

ESMA’s second risk monitoring report of 2026 covers developments in key EU financial market segments during the first half of the year. It also examines UCITS market fragmentation, technology initial public offerings in the United States and prediction markets.

The authority highlighted rapidly emerging threats to market infrastructure and major market participants, including risks associated with frontier artificial intelligence.

Equities and bonds

Equity markets fell sharply after the outbreak of the Middle East conflict but later recovered to, or above, their pre-conflict levels.

ESMA said elevated valuations, together with a weaker macro-financial and geopolitical outlook, had increased the risk of abrupt corrections.

In bond markets, concerns have emerged over funding conditions and bonds’ traditional safe-haven role, with sovereign yields rising and spreads widening.