ECB Economists Warn of Potential Correction in US Stocks

Five economists from the European Central Bank have sounded an alarm about a potential correction in US stock market valuations. In a recent analysis, they argue that a correction is likely, regardless of whether current prices are rational.

The economists point out that valuations in the US are near historical peaks in the CAPE index, while the euro zone has also seen gains, albeit smaller. They cite studies on past technological revolutions, which suggest that extreme uncertainty about the efficiency of new technologies can sustain high multiples initially, but prices can still fall later without a decline in profits.

The economists also warn of overly confident investors driving prices beyond fundamentals and a reduction in confidence leading to deeper declines. They highlight the euro zone's exposure to the US technology sector, with households holding around €440 billion in positions mainly through mutual funds and ETFs.