The Great Disconnect: Financial Markets Cheerful as Real Economy Outlook Dims

A great disconnect is widening between cheerful financial markets and a darkening outlook for the real economy, a major new report has warned. While stock markets, buoyed by AI optimism, have reached “stretched valuations,” the institution’s forecast for the global economy is described as “dim,” with multiple real-world threats mounting.
The report highlights the risk that this disconnect could snap back violently. It cautions that if investors’ rosy assessment of generative AI’s immediate profits fades, the resulting “correction” in share prices could cause a “rather sharp” decline in real-world business investment, dragging the entire economy down with it.
This financial market risk is a key reason for the report’s pessimism, which persists even as the 2025 global growth forecast has been upgraded to 3.2%. The institution clearly believes that investors are not paying enough attention to the fundamental challenges facing the economy.
These challenges include the lingering threat of trade tariffs, which are expected to eventually suppress investment, and the economic damage from restrictive immigration policies, which could slow growth and fuel inflation. These are real-world problems that the current market rally seems to be ignoring.
The UK’s situation, with modest growth but G7-leading inflation, is another example of a real-world problem that adds to the global risk profile. The report serves as a warning that the party in the financial markets is dangerously out of sync with the storm clouds gathering over the real economy.