Bank of England warns AI bubble could trigger sharp correction as debt risks mount

UK share values 'most stretched' since 2008, Bank warns

The Bank of England has warned of a "sharp correction" in the value of major tech companies with growing fears of an artificial intelligence (AI) bubble. It said share prices in the UK are close to the "most stretched" they have been since the 2008 global financial crisis, while equity valuations in the US are reminiscent of those before the dotcom bubble burst. The central bank's financial stability report warned valuations are "particularly stretched" for companies focused on AI. It said the growth of the sector in the next five years would be fuelled by trillions of dollars of debt, raising financial stability risks if the value of the companies falls.

Bank of England warns debt-fuelled AI spending boom could unravel

The Bank of England has issued a stark warning. A massive spending boom in artificial intelligence infrastructure, funded by debt, faces significant risks. Stretched stock market valuations are a major concern. A correction in AI stocks could impact wider debt markets. This situation is developing and could affect household wealth and borrowing costs. The Bank of England warned that a multi-trillion dollar spending boom in artificial intelligence infrastructure financed by debt risks unravelling given "materially stretched" stock market valuations. The UK central bank said on Tuesday that a correction in AI stocks would spill over to wider debt markets and pointed to early warning signs in credit default swaps of companies leaning on debt to fund their investments. While currently investment in the technology is mostly driven by cash held by "hyperscalers," it said around half of the expected $5 trillion of AI spending over the next five years will be financed externally, largely through debt. In its twice-yearly Financial Stability Report, the BOE said that a sharp fall in stock valuations could hit UK household wealth, feeding through to consumer spending. It would also trigger losses on lending to firms investing heavily in AI infrastructure, ramping up borrowing costs for companies more widely. It's the latest warning about a possible AI bubble collapsing, with some drawing parallels with the dotcom boom that burst in stock markets in the early 2000s. As concerns build that valuations are reaching irrational levels, firms are investing heavily in AI infrastructure, such as building out the data centres needed for the technology. The BOE estimates that AI has driven two thirds of this year's gains on the S&P 500 index and investment in the technology was behind half of US economic growth in the first half of 2025. "The financing of AI development is reaching an inflection point," the BOE said. "If material credit losses on AI lending were to occur (directly or indirectly), this could have spillovers to broader credit conditions including in the UK." The central bank said there has recently been rising corporate debt issuance by AI companies and pointed to some warning signs building. "The five-year credit default swap spreads of Oracle-an AI company which has lower free cash flow margins than some other larger hyperscalers and has issued a large amount of debt this year to finance AI infrastructure spending-has widened from less than 40 basis points to around 120 basis points since end-July," it said. That contrasts with the steady credit default swap spreads of US investment-grade corporates more broadly. Credit default swaps insure against a company defaulting on its debts. They usually rise when investor confidence in the firm's credit quality falls.