On May 8, the Fed published its semiannual Financial Stability Report, which assesses vulnerabilities in the U.S. financial system using data through April 23. Among key findings, the report states that: (i) asset valuation pressures remained elevated, as the forward price-to-earnings ratio for equities stayed in the upper range of its historical distribution and corporate bond spreads remained low by historical standards; (ii) Treasury term premiums moved higher amid volatility owing in part to geopolitical tensions in the Middle East, and market liquidity briefly deteriorated before recovering; (iii) total business and household debt relative to GDP continued to decline “to levels not seen since the early 2000s,” though delinquencies on FHA loans remained above pre-pandemic levels; (iv) the banking system remained sound with historically high regulatory capital ratios, as banks reduced exposure to interest rate risk by shortening asset duration; and (v) auto and credit card delinquencies remained at high levels relative to the past decade.

The report further notes that hedge fund leverage stayed near all-time highs and remained concentrated in the largest funds, while leverage at the largest life insurers stayed in the top quartile of its historical distribution. Further, the report states that commercial real estate (CRE) prices continued to stabilize following significant declines, though a large volume of CRE debt scheduled to mature over the coming year raises the possibility of forced sales that the Fed notes could potentially put downward pressure on prices. On funding risks, the Fed highlighted that certain nontraded business development companies faced notable increases in redemption requests, with some exercising limits on the size of redemptions amid concerns about asset quality, though overall risks to financial stability from further redemptions appeared “limited and manageable.” However, the Fed cautioned that continued redemptions and negative sentiment could reduce credit availability for some borrowers, particularly those with relatively higher credit risk.

Separately, a companion survey of 20 market contacts identifies geopolitical risks and an oil shock as the most frequently cited threats following the onset of the Iran conflict. AI, private credit, and persistent inflation also drew significant attention, and several respondents warned that a correction in risk assets could be triggered by AI valuation concerns or an escalation in the conflict.