The vice-president of the European Central Bank (ECB) warned Wednesday that current high valuations in U.S. equities could spark a possible correction in global stock markets.
Speaking to CNBC, Vitor Constancio said: “Certainly the cyclically-adjusted price (to) earnings ratio in the U.S. is well-above historical averages.”
This ratio is an important metric used by traders to gauge the value of stocks. The fact that they are above their usual average means that there’s the risk of a potential overvaluation in the U.S. stock market — which could potentially lead to a reversal.
“We see that some markets are overstretched or at least with indicators that are away above the historical averages,” Constancio told CNBC.
“At the same time we can see that volatility both in the equity and the bond market is very low, which experiences shows in those situations some events may trigger a sudden revision of expectations by investors,” the Portuguese banker said.
The ECB released Wednesday its biannual Financial Stability Review, in which the central bank points to potential risks to the stability of the euro area. In the report, the bank said that despite the improved economic growth in the euro area there are concerns related to a sudden increase in volatility.
Markets have been on the bullish side throughout the year and many continue to push further into record territory. The ECB believes there is the risk that this overall sense of optimism is miscalculated, which could end up shaking financial markets once money managers realize they took on more risk than they could handle.