European Central Bank (ECB) Vice President Luis de Guindos cautioned on Wednesday that the risk of a market correction has heightened as investor enthusiasm has driven stocks to record levels despite ongoing geopolitical tensions, fiscal pressures, and concerns over private credit vulnerabilities. Speaking in an interview, de Guindos highlighted that markets may be underestimating major risks associated with the conflict involving Iran, elevated asset valuations, and fragilities within non-bank financial institutions.

European and global equities have shown continued strength in recent weeks, even amid instability in the Middle East and persistent inflationary concerns. De Guindos emphasized that “there is a risk of a correction because valuations in markets are quite high,” adding that geopolitical developments remain the ECB’s primary concern.

He also drew attention to Europe’s fiscal challenges and the growing interconnectedness between traditional banks and private credit institutions, warning these could pose systemic risks. De Guindos noted that markets currently seem to be pricing in a swift resolution to the conflict but cautioned that if this expectation does not materialize, it could lead to a reassessment of market conditions.

The ECB released its latest Financial Stability Review on Wednesday, underscoring how “geoeconomic stress” and disruptions in energy supplies are shaping risks to the euro area’s economy. The report highlighted that prolonged geopolitical tensions and fiscal difficulties could dampen investor sentiment, particularly for highly indebted eurozone countries vulnerable to rising borrowing costs and weaker confidence.

The central bank also flagged vulnerabilities in non-bank financial firms, including private equity and private credit sectors. These entities often have low liquidity buffers, concentrated exposures, and inflated valuations, which could exacerbate stress during broader market downturns. Regulatory scrutiny of private markets has recently increased amid concerns that leverage and liquidity risks outside the traditional banking system could propagate financial instability.

This warning comes as investors reassess the future path of interest rates in Europe. Despite euro-area inflation accelerating to 3% in April, the ECB has maintained its key interest rate at 2%, signaling that future decisions will depend on incoming inflation data and economic indicators. ECB President Christine Lagarde has reaffirmed the central bank’s readiness to act should inflation pressures persist.

De Guindos described the current situation as a challenging balancing act for central banks aiming to contain inflation while supporting economic growth. “There is not any sort of fait accompli with respect to the evolution of rates,” he said, stressing that all relevant factors will be carefully evaluated.

Separately, Bank of France Governor Francois Villeroy de Galhau reiterated the ECB’s commitment to bringing inflation back to its 2% target over the medium term. Speaking to CNBC on Tuesday, he urged markets to maintain confidence that policymakers would take necessary actions to stabilize prices.

The ECB’s next inflation data release is scheduled for June 2, with the subsequent monetary policy meeting set for June 10-11.