Sky-high stock valuations are increasing the risk of 'disorderly corrections' that could rattle the economy, IMF warns

Core Insights - The IMF warns that elevated stock valuations pose risks to financial markets and the global economy, indicating a potential for turbulence due to high asset prices above fundamentals [1][6] Valuation Concerns - US stocks, particularly the S&P 500, are highly valued, with the 12-month forward PE ratio being higher than 96% of the time since 1990, suggesting a fair value at the 81st percentile [2][6] - The IMF highlights that valuations of risk assets appear stretched amid a slowing global economy, with historical precedents indicating that extreme valuations can lead to market corrections [5][6] Concentration Risks - The concentration of investments in AI stocks is a significant risk, with the "Magnificent Seven" stocks comprising 33% of the S&P 500, which historically precedes market pullbacks [3][6] - A major portion of household exposure to stocks is through benchmark indices like the S&P 500, primarily in retirement accounts and passive investment vehicles, making household balance sheets vulnerable to market corrections [7] Economic Implications - A stock market sell-off could lead to reduced consumer spending due to the wealth effect, where gains on paper drive consumer confidence and spending behavior [4][5] - The IMF notes that 30% of household assets are in stocks, which is near record levels, indicating that a correction could have broader implications for the real economy [5][6]