Regulatory news · European Union

ESMA flags market risks masked by investor optimism

By Mardo Soo, Founder & CEO, Consulting24 · Published 12 September 2026

ESMA's second risk monitoring report of 2026 finds stretched technology valuations and geopolitical tensions testing market resilience amid persistent inflation and weaker growth.

The European Securities and Markets Authority has published its second risk monitoring report of 2026, setting out the main risks and vulnerabilities in EU financial markets. ESMA, described in the document as the EU's financial markets regulator and supervisor, 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.

According to the document, strong performance in technology and AI-related sectors has been helping to sustain fast recovery of investor optimism and financial markets valuations, despite heightened market volatility and event-driven uncertainty. ESMA states that this resilience should not be mistaken as an absence of vulnerabilities. The document says 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. It adds that rapidly emerging threats to market infrastructures and key market players, such as those linked to frontier AI, should not be overlooked.

Chair warns on gap between optimism and outlook

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.

Equity and bond market developments

On securities markets and crypto-assets, the document states that 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, ESMA says 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, asset management and consumers

Key market infrastructures have continued to function well, even during recent market stress, where clearing houses, known as central counterparties, handled volatile energy trading without disruption, according to the document. 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.

In 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.

On consumers, the document says digital platforms have made it easier for retail investors to access markets, and this is shaping behaviours in different ways. 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 uninformed or impulsive investment decisions.

Structural developments and financial innovation

On market-based finance, IPO activity remained limited in the EU, and follow-on issuance was below historical averages. Corporate bond issuance stayed strong, although the pace of short-term debt issuance moderated and refinancing risks increased. On 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.

On 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.

What this means: EU rules set the floor for anyone serving EU clients, so a change here usually changes the sequencing of an application rather than the destination. Consulting24 delivers CASP-track company and licensing work directly in Estonia and Lithuania, and the binding constraint is normally the regulator's queue rather than the incorporation.

General guidance, not legal advice. Regulations change, and we confirm current requirements for your case.