Bank of England Warns of Potential AI Bubble Burst and Market Correction

Bank of England warns of 'sharp market correction' if AI bubble bursts

Bank of England, the Royal Exchange and the statue of the Duke of Wellington in the City of London on 19th February 2025 in London, United Kingdom. The Bank of England on Wednesday warned that the risk of a "sharp market correction" has increased, noting that stock market valuations appear stretched, particularly for artificial intelligence-focused tech firms. The central bank becomes the latest in a long list of banks and investors to weigh in on whether an AI bubble is forming as markets tick into the fourth quarter. Heightened geopolitical tensions, fragmented trade and financial markets and pressures on sovereign debt markets play into the risk, the Bank of England said in a record of its latest meeting minutes. "A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre," it said. Equity market valuations stood at near all-time highs, the Bank of England said, thanks in part to strong second-quarter earnings by U.S. tech firms. "The market share of the top 5 members of the S&P 500, at close to 30%, was higher than at any point in the past 50 years," it said, noting that AI-focused tech company valuations appear particularly stretched. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic," the meeting minutes said. With such high expectations of future earnings growth, any pullback on AI-related bets could lead to ripple effects, it added. Investors are closely watching AI-related stocks as earning season gets underway, with some strategists confident that tech company valuations are being driven by sound fundamentals. Goldman Sachs also remained cautiously optimistic in its latest note, believing a bubble has not yet formed but heeded a warning to investors to "diversify." Federal Reserve Chair Jerome Powell, however, warned of "fairly highly valued" assets on Tuesday, though he didn't explicitly refer to technology firms. The Bank of England further warned that "downside factors included disappointing AI capability/adoption progress or increased competition, which could drive a re-evaluation of currently high expected future earnings."

Bank of England Warns of an AI Bubble Burst

The central bank of the United Kingdom is worried about an AI bubble burst. "On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI)," the bank's financial policy committee said, according to a record of its latest meeting. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic." The Bank also warned that stock market price valuations were comparable to the peak of the dot-com bubble, and the market share of the top five members of the S&P 500 was at its highest concentration in 50 years. Those five companies are, unsurprisingly, AI-focused tech giants Nvidia, Microsoft, Apple, Amazon, and Meta. All five of these companies are spending eye-watering figures on AI, and the stock market loves it. Microsoft became the second company to ever hit a $4 trillion market valuation earlier this year after posting its largest ever quarterly expenditure forecast. Nvidia, on the other hand, is the first and only company in the world to hit a $4.5 trillion market cap. "Material bottlenecks to AI progress â€" from power, data, or commodity supply chains â€" as well as conceptual breakthroughs which change the anticipated AI infrastructure requirements for the development and utilisation of powerful AI models could also harm valuations, including for companies whose revenue expectations are derived from high levels of anticipated AI infrastructure investment," the bank said. Fed researchers issued a similar warning earlier this year. While that alert did not identify an immediate risk of an AI bubble, the researchers pointed out that a risk that comes with building expensive infrastructure too quickly for anticipated demand was that demand might not grow as expected. In that case, it could lead to "disastrous consequences," the Fed warned, likening it to the railroad over-expansion of the 1800s that led to an economic depression towards the turn of the century. These top AI companies with high revenue expectations are also heavily reliant on each other financially, increasing worries of a cascade effect if a bubble bursts. AI companies ink multibillion-dollar deals with each other over and over again, injecting more money into the system and ballooning stock valuations with each deal. While that's happening, some experts are admitting overvaluation. Apollo Global Management's chief economist Torsten Slok said in July that the AI bubble of today is actually worse than the 1999 dot-com bubble. OpenAI CEO Sam Altman also admitted in August that he thinks investors are "over-excited about AI." The main downside risks of AI overvaluation, according to the bank, also include disappointing AI capability or adoption progress. A recent MIT report found that despite the major push to adopt AI in the corporate world, fewer than one in ten AI pilot programs actually generated real revenue gains. The report spooked investors enough that AI stocks immediately slid following the headlines in August. Last month, the Census Bureau showed that the rate of AI adoption by large companies had been declining slightly. Nonetheless, executives keep assuring investors that AI demand is scaling rapidly as the technology finds its way into more and more areas of life. AI computing demand is up "substantially" in the past six months, according to Nvidia CEO Jensen Huang's comments on Wednesday. But if the tech giants are wrong and the Bank of England's risk scenario does end up being the case, the bank warned that a sudden, sharp correction could occur, "adversely affecting the cost and availability of finance for households and businesses." The U.S. has reason to be afraid of this. According to recent reports, the AI spending frenzy is not just propping up the American stock market, but it's also lifting the real economy. According to Harvard economist James Furman's calculations, U.S. GDP growth in the first half of the year was almost entirely driven by investments made in data centers and other information-processing technology.

Bank of England Warns of Impending AI Disaster

The Bank of England has sounded the alarm, warning of an intensifying risk of a "sudden correction" in global financial markets driven by the spending frenzy on artificial intelligence. As Reuters points out, it's the institution's clearest warning yet that we could be on the precipice of an AI disaster. "The risk of a sharp market correction has increased," said the Bank of England's financial policy committee during a Wednesday meeting, as quoted by Reuters, warning that "equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence." "Should expectations around the impact of AI become less optimistic," markets could be left "particularly exposed," the bank cautioned. Concerns over an AI bubble bursting have grown lately, with analysts recently finding that it's 17 times the size of the dotcom-era bubble and four times bigger than the 2008 financial crisis. Analysts -- and even OpenAI CEO Sam Altman himself -- have acknowledged that AI companies are struggling to make enough money to cover their exorbitant expenses, concerns that drove a major tech selloff earlier this year. And whether they'll ever be able to produce enough revenue is a looming question. A startling report by researchers at MIT spooked investors in August, finding that only a measly five percent of AI pilot programs help businesses succeed at "rapid revenue acceleration," with the vast majority falling flat. Yet according to recent estimates, generative AI now accounts for roughly 40 percent of the United States' gross domestic product. In other words, if the AI spending boom falls apart, it could take down the entire economy with it. Fund manager and former Morgan Stanley investor Ruchir Sharma warned in a recent piece for the Financial Times that the US economy has turned into "one big bet on AI." "AI companies have accounted for 80 per cent of the gains in US stocks so far in 2025," he wrote. "That is helping to fund and drive US growth, as the AI-driven stock market draws in money from all over the world, and feeds a boom in consumer spending by the rich." Put simply, only the extremely wealthy appear to be benefiting from all of this. "The top ten percent of earners account for half of consumer spending," Sharma added, "the highest share on record since the data begins." "The AI trade is beginning to resemble one of the great speculative manias of market history," Selwood Asset Management chief investment officer of equities Karim Moussalem wrote in a LinkedIn post last week. "For me, there is no denying that we are in the midst of a bubble, and a total retail-driven frenzy." Meanwhile, the White House has stoked ongoing fears of a major correction, with president Donald Trump repeatedly urging the US central bank to slash interest rates in an effort to make interest payments on US debt more affordable. "A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of US dollar assets, including in US sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers," the Bank of England warned, as quoted by Reuters. However, tech leaders are mostly soaring above the anxiety about an AI bubble, or even flipping those concerns around to frame the possibility as a positive: during an event last week, Amazon founder Jeff Bezos claimed that if such a bubble were to burst, "it can even be good, because when the dust settles and you see who are the winners, societies benefits from those inventions." "This is real, the benefits to society from AI are going to be gigantic," Bezos added.

BoE issues warning over potential AI bubble

This content has been selected, created and edited by the Finextra editorial team based upon its relevance and interest to our community. The latest report from the central bank's Financial Policy Committee, warns that valuations of stocks "appear stretched, particularly for technology comp[anies focused on AI". This leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic, according to the bank The report, which did not mention any companies by name, draws comparisons with the dotcom bubble at the turn of the millennium which saw a sharp drop in the stock price of a host of online and ecommerce companies, including a number of fintechs. AI companies have become increasingly prominent in the financial services market. Generative AI developer OpenAI recently acquired Roi, a personal finance app, suggesting that AI could make further inroads into the financial advisory market. Meanwhile some of the largest companies associated with AI have seen their valuations rise significantly in recent months. The report highlights a number of additional factors that have added uncertainty to the global economy, such as geopoltical tension, fragmentation of global trade and presasure on sovereign bond markets. "Uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes, and a sudden correction could occur should any of these risks crystallise," states the bank. "A sharp correction could interact with vulnerabilities in the system of market-based finance, adversely affecting the cost and availability of finance for households and businesses."

AI firms vulnerable to sharp drop in valuations, Bank of England warns

(Alliance News) - Tech firms are vulnerable to the risk that soaring valuations will drop sharply amid potentially "disappointing" progress around artificial intelligence, AI, the Bank of England has warned. The risk of a "sharp correction" in the financial markets has increased, the Bank's Financial Policy Committee, FPC said. The minutes of the FPC's latest meeting read: "On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence. "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic." It said there was a risk that "disappointing" progress on AI capability or adoption, or increased competition could drive valuations lower across the sector. "Material bottlenecks to AI progress" including across power, data, or commodity supply chains could also harm valuations, particularly for firms who are expected to benefit from greater AI investment, the FPC said. It comes at a time that valuations for tech firms have boomed amid expectations that the adoption of AI technology will ramp up around the world. Huge technology companies like Nvidia Corp, Alphabet Inc's Google and Microsoft Corp have all seen their share prices soar over the past year. By Anna Wise, PA Business Reporter