US shares risk ‘sharp correction' but markets seem complacent, IMF warns

Group 1 - The International Monetary Fund (IMF) warns that US stock markets, which have surged during the AI boom, are at risk of a sudden correction, while government bond markets face increasing pressure [1][5] - The IMF highlights vulnerabilities in the financial system, particularly in stock and bond markets, and among non-bank financial intermediaries (NBFIs), which are now closely linked to the banking sector [2][7] - US stock markets have reached record highs, but the gains are concentrated among a small group of tech firms, referred to as the "magnificent seven," which includes Apple, Nvidia, and Meta, accounting for 33% of the S&P 500 index [3][4] Group 2 - The IMF expresses concern that if mega-cap stocks fail to deliver expected returns, it could lead to a decline in investor sentiment and a sharp correction in stock valuations, impacting the broader market [5] - The stability of government bond markets is questioned, with many countries increasing borrowing and relying on price-sensitive investors rather than traditional domestic pension funds [5][6] - The IMF warns that the rapid growth of NBFIs, which have less stringent capital requirements than traditional banks, poses systemic risks, especially as mainstream banks increase their lending to these institutions [7][8] Group 3 - The IMF emphasizes the need for better regulation of NBFIs due to their growing importance in financial intermediation and the potential risks they pose to banks' capital ratios [8] - The report stresses the urgency of implementing new bank capital rules under the Basel III regime to prevent future crises, noting that the US has not yet done so [9] - The IMF calls for the preservation of central bank independence to maintain trust in the institutional foundations of G4 economies, which is crucial for the safe-asset status of their sovereign bonds [10][11]