On April 14, 2025, the International Monetary Fund (IMF) released a chapter from its forthcoming Global Financial Stability Report, highlighting the potential for significant stock market corrections and increased volatility due to major geopolitical events, including trade tensions. The report underscores a sharp rise in risk-inducing factors such as wars, terrorism, and trade restrictions since 2022.

The IMF's analysis indicates that international conflicts can lead to a median global stock return decline of 1% monthly, with emerging markets experiencing a 2.5% drop. Military conflicts, such as Russia's 2022 invasion of Ukraine, were identified as particularly disruptive, reducing stock returns by an average of 5% monthly. The IMF advises financial institutions to strengthen their capital and liquidity buffers and to employ stress testing to withstand potential shocks.

In an accompanying blog, the IMF urged financial institutions to hold enough capital and liquidity to help them deal with potential losses from geopolitical risks, and urged them to use stress tests and other analyses to identify and manage such risks.

The IMF also noted that heightened geopolitical risks drive up sovereign risk premiums and could spill over to other areas. The full report is scheduled for release during the IMF's upcoming spring meetings with the World Bank.

The IMF's findings underscore the intricate relationship between geopolitical events and financial market stability. As global tensions continue to evolve, it becomes imperative for financial institutions, policymakers, and investors to remain vigilant and proactive in mitigating potential risks.