The Bank of England warned of the risk of a “sudden correction” in the markets, emphasizing that valuations appear excessively high, particularly for technology companies focused on artificial intelligence (AI).
Thus, the Bank of England becomes the latest link in a chain of banks and investment organizations warning of a potential “AI bubble,” as global markets enter the final quarter of the year.
According to the minutes of its latest meeting, the Bank noted that geopolitical tensions, a fragmented trade and financial landscape, and pressures on government debt markets increase the risks of global turmoil:
“The realization of these risks could have a significant impact on the United Kingdom, as an open economy and international financial center,” it states.
Domino of decline
Stock valuations are near historically high levels, partly due to strong fourth-quarter results from American technology companies.
The five largest companies in the S&P 500 index hold almost 30% of the market, a percentage higher than at any point in the last 50 years.
“This increasing concentration in the markets makes the indices particularly vulnerable if expectations around the impact of AI begin to decline,” the minutes note.
The Bank warns that any revision of forecasts for future earnings could trigger a domino effect of declines in the markets.
With such high expectations for future profit growth, any retreat in AI-related investments could trigger chain reactions across the market.
Investors are closely monitoring technology stocks as earnings season begins, with some strategic analysts estimating that valuations are supported by healthy fundamentals.
Although some analysts—such as those at Goldman Sachs—believe a bubble has not yet formed, they warn investors to “diversify” their portfolios.
Increased risk
Federal Reserve Chairman Jerome Powell warned of “highly valued” assets, though he did not explicitly refer to technology companies.
The Bank of England also warns that “negative developments may include disappointing progress in AI capability or adoption, or increased competition, which could lead to a reassessment of high current expectations for future earnings.”
“Substantial obstacles to AI progress—from energy, data, or raw material supply chains—as well as conceptual advances that change infrastructure requirements for the development and use of powerful AI models, could also harm valuations, even for companies whose revenue expectations are based on high AI infrastructure investments,” the Bank adds.
Meanwhile, the private credit market has been hit following the bankruptcies of Tricolor and First Brands, while political instability in France and Japan, as well as interventions by former U.S. President Donald Trump in the Fed, cast additional shadows over the global climate.
The Bank warned that these changes “increase the risk that markets have not fully priced in potential negative scenarios,” which could lead to a sudden correction if these risks materialize.
Such a development, it adds, would have serious implications for households and businesses, especially at a time when they are already under pressure from high living and borrowing costs.
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