Ongoing geopolitical and economic vulnerabilities masked by strong investor optimism

ESMA finds that, while markets have remained resilient, stretched technology valuations and heightened geopolitical tensions are testing this resilience, in a climate of persistent inflation and weaker economic growth. Despite heightened market volatility and event-driven uncertainty, strong performance in technology and AI-related sectors has been helping to sustain fast recovery of investor optimism and financial markets valuations. 

This resilience should not be mistaken as an absence of vulnerabilities. The disconnect between deteriorating macro-financial conditions and upbeat market valuation increases the risk of sudden market corrections, should economic risks materialise or investor sentiment shift abruptly. At the same time, rapidly emerging threats to market infrastructures and key market players, such as those linked to frontier AI, should not be overlooked.

Verena Ross, ESMA’s Chair, said:

“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.

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

Beyond these risk drivers, ESMA’s report sets out market developments and conditions across key segments of EU financial markets during the first half of 2026. It also provides in-depth analysis on selected topics, including UCITS market fragmentation, technology IPO trends in the US and prediction markets.

Market developments

Securities markets and crypto-assets

Equity markets fell sharply following the outbreak of the Middle East conflict, but prices have since rebounded to, or above, pre-conflict levels. Nevertheless, elevated valuations amid a weaker macro-financial and geopolitical outlook have increased the risk of abrupt corrections. In bond markets, concerns have emerged over funding conditions and the safe-haven role of bonds, with sovereign yields rising and spreads widening, while volatility remains elevated despite largely stable EU credit quality indicators. Beyond listed markets, risks also warrant close monitoring in less transparent and increasingly interconnected segments, both in private credit exposures to the US market, and in the growing linkage between increasingly vulnerable crypto-asset markets and the broader financial system.

Infrastructures and services

Key market infrastructures have continued to function well, even during recent market stress, where clearing houses, known as central counterparties (CCPs), handled volatile energy trading without disruption. Settlement systems, however, saw a short-lived rise in failed transactions across asset classes in early April. Cyber risks are increasingly important as frontier AI developments are shifting the operational risk landscape.

Asset management

Fund flows and performance remained positive despite the volatile market environment. While interest rate and credit risks are emerging as growing concerns, the available risk indicators remain broadly stable at this time. Valuation risk continues to be an issue across most fund categories. 

Consumers

Digital platforms have made it easier for retail investors to access markets, and this is shaping behaviours in different ways. On the one hand, many investors continue to favour passive products for long-term investing, while the same platforms can also facilitate short term or speculative trading. Overall, exposure to social media content and gamification features on digital platforms may encourage uniformed or impulsive investment decisions. 

Structural developments

Market-based finance

IPO activity remained limited in the EU, and follow-on issuance was below historical averages. At the same time, corporate bond issuance stayed strong, although the pace of short-term debt issuance moderated and refinancing risks increased.

Sustainable finance

Global climate policy tensions and energy security concerns continued to weigh on ESG sentiment. Nevertheless, ESG funds saw mixed developments overall, with renewable energy and transition-focused funds attracting inflows. The EU ESG bond market remained resilient, supported by the growing use of proceeds linked to renewable energy projects.

Financial innovation

Tokenisation of equities remains at an early stage, but adoption momentum is increasing. In decentralised finance, recent exploits have renewed concerns about interconnectedness and potential spillovers. Investment in artificial intelligence continues to expand, reflected in the growing number of AI-focused funds, particularly those targeting AI infrastructure. Meanwhile, quantum computing has attracted significant investor interest, with both global and EU startup funding reaching record levels in 2025.

Further information:

Ana Dilaverakis

Communications Officer
press@esma.europa.eu