The Bank of England warns that an AI stock bubble could trigger a major market correction. Photo / Getty Images
The Bank of England has warned that a bubble in artificial intelligence (AI) stocks threatens to spark a major market correction, posing a “material” danger to Britain’s economy.
A collapse in over-valued US tech stocks that bears echoes of the dotcom bubble risks triggering a global shock, Threadneedle St said in its starkest warning on AI to date.
The Financial Stability Committee (FPC), its panel of policymakers tasked with identifying what could spark the next financial crisis, said: “On a number of measures, equity market valuations appear stretched – particularly for technology companies focused on artificial intelligence.”
It noted that the market share of the five most valuable firms on the blue-chip S&P 500 index is greater than at any point in 50 years, at near 30%.
Policymakers fear that the surge of money flowing into these firms may fail to deliver the expected returns – with markets only pricing in potential upsides.
The FPC said: “The risk of a sharp market correction has increased. A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre.”
It came as the managing director of the International Monetary Fund (IMF) similarly warned that inflated share prices posed a growing risk to financial stability.
Kristalina Georgieva said current market valuations were “masking” fragilities as she compared the current situation to the dotcom bubble in the early 2000s that ended in a stock market crash.
Speaking before the IMF annual meetings in Washington DC next week, Georgieva said: “Today’s valuations are heading toward levels we saw during the bullishness about the internet 25 years ago.
“If a sharp correction were to occur, tighter financial conditions could drag down world growth, expose vulnerabilities and make life especially tough for developing countries.”
The bank also drew parallels to the dotcom bubble – when money poured into tech stocks as investors bet the internet would transform the economy.
The subsequent disappointment over returns triggered a major stock market sell-off, from which US equities took the best part of a decade to recover before then being hit by the financial crisis.
However, Jensen Huang, the chief executive of AI chipmaker Nvidia, said that the current boom in AI stocks is “dramatically different” to the dotcom bubble.
Huang said the boom was being financed by large, profitable companies and that the increase in spending was “just getting started”.
“What’s going on in the world versus what happened in 2000 is just dramatically different,” he told CNBC.
“Back then... all the internet companies combined was, what, US$30-$40b [$52-$69b] in size. If you look at the [Big Tech] hyperscalers now... that’s about two and a half trillion dollars of business that’s already operating today.”
Valuations are near all-time highs, driving fears that markets have further to fall at a time when the global economy is already fragile.
The bank’s committee said that overly buoyant valuations of tech firms and their dominance “leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic”.
The bank fears that such a shock would trigger a domino effect echoing across stock markets across the world and making lenders reluctant to lend to companies.
The warning comes as Donald Trump’s trade war and a rise in government borrowing costs are already posing big threats to the global economy.
“A sudden correction could interact with vulnerabilities in the system of market-based finance, adversely affecting the cost and availability of finance for households and businesses.”
Georgieva warned that overall debt levels were also spiralling out of control and were projected to exceed the total size of the global economy by the end of the decade.
This “sobering reality” would make it harder for governments to pay down debt and limit their ability to spend on vital public services, the IMF chief warned.
However, she hinted that the Fund would upgrade its growth forecasts next week.
The FPC reiterated that Donald Trump’s attempts to undermine the Federal Reserve’s independence risks creating a major shock to the dollar and US Treasuries.
This would could have “global spillovers”, it said.
The warning came as gold prices surged past $4000 for the first time amid concerns that “runaway” government spending could push up inflation.
Concerns over government instability have triggered a pile on into the safe haven assets, with bullion spot prices rising 1% to US$4021.22 per ounce on Tuesday night, taking its gains for the year beyond 50%.
Gold is seen as a store of value during times of instability.
The bank noted that government borrowing costs around the world are rising, as debt-bloated administrations struggle to balance the books – highlighting political chaos in France.
The FPC said: “This increases the vulnerability of sovereign debt markets and adds to pressure on governments’ capacity to respond to shocks.”
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