Global stock markets are too inflated and will fall, top Bank of England official warns

International equity markets are priced too high and will fall, according to a senior leader at the Bank of England.

Sarah Breeden, deputy governor for financial stability at the U.K.'s central bank, told the BBC in an interview published Friday that macroeconomic risks were not fully priced into equity markets.

"There's a lot of risk out there and yet asset prices are at all-time highs," she said. "We expect there will be an adjustment at some point."

It is unusual for Bank of England officials to be so candid about expectations for capital markets.

"The thing that really keeps me awake at night is the likelihood of a number of risks crystallizing at the same time — a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust — what happens in that environment and are we prepared for it?" Breeden said during the interview.

Global equity markets have been volatile since the U.S. and Israel launched joint strikes on Iran in late February, but many developed markets are still trading near record highs. On Wednesday, New York's S&P 500 and Nasdaq Composite closed at new all-time highs, with global stocks having clawed back from Iran war losses.

S&P 500

The MSCI World ex-U.S. index, a measure of large and mid-cap stocks listed across more than 20 developed markets, has also made gains since the war began, and is up more than 5% year-to-date.

Breeden also pointed to problems in private credit in Friday's interview, where mounting defaults have drawn criticism and concern from market watchers.

"Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. It hasn't been tested at this scale with the degree of complexity and interconnections it has with the rest of the financial system so far," Breeden said.

"It's a private credit crunch, rather than a banking-driven credit crunch, that we're worried about."

The Iran war has left uncertainty hanging over global markets for the past two months, but many market participants remain optimistic about where equities are headed, even in spite of record valuations.

In his latest monthly letter to clients, Mark Haefele, chief investment officer at UBS Global Wealth Management, said that elevated energy costs presented a risk, but struck a positive note on global stocks.

"Absent a prolonged shock, we believe the backdrop for the economy and corporate earnings remains solid, supporting equities," he said.

"If companies deliver on earnings expectations and geopolitical tensions ease even slightly, there is a clear pathway for equities to move higher," Daniel Casali, chief investment strategist at wealth management firm Evelyn Partners, said in a note last week.

"For investors, earnings rather than energy may be the dominant market driver for the rest of the year."

Nigel Green, CEO of deVere Group, said that, while Breeden was right to say valuations are high and investors must not be complacent, the conclusion that markets are set for a broad fall "misses the central point, which is that AI and tech are changing the valuation framework in real time."

"We have never had AI before at this scale," he said in a note after Breeden's interview was broadcast. "There's no clean historical benchmark for what markets should pay for companies leading a once-in-a-generation productivity, infrastructure and earnings cycle."

Others, including Goldman Sachs boss David Solomon and Trump himself, have expressed surprise at the market's resilience amid the Iran war.

— CNBC's Sean Conlon and Lisa Kailai Han contributed to this report.