The Bank of England has warned there is a growing risk of a “sudden correction” in global markets as it raised concerns about soaring valuations of leading AI tech companies.
Policymakers said there were also threats of a “sharp repricing of US dollar assets” if the Federal Reserve lost credibility in the eyes of global investors. It comes as Donald Trump’s continues to attack the US central bank and threaten its independence.
Continued hype and optimism about the potential for AI technology has led to a rise in valuations in recent months, with companies such as OpenAI now worth $500bn (£372bn), compared with $157bn last October. Another firm, Anthropic, has almost trebled its valuation, going from $60bn in March to $170bn last month.
However, the Bank of England’s financial policy committee (FPC) warned on Wednesday: “The risk of a sharp market correction has increased.
“On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence. This … leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic.”
It said investors had not fully accounted for these potential risks, warning that “a sudden correction could occur” should any of them crystallise, resulting in finance drying up for households and businesses. The FPC added: “As an open economy with a global financial centre, the risk of spillovers to the UK financial system from such global shocks is material.”
Faith in the AI boom has recently been rattled by research from the Massachusetts Institute of Technology, which showed that 95% of organisations are getting zero return from their investments in generative AI.
That has fed into concerns that stock market valuations could tumble if investors ended up being disappointed by the progress or adoption of AI technology. The FPC said this “could drive a re-evaluation of currently high expected future earnings”.
It added: “Material bottlenecks to AI progress – from power, data or commodity supply chains – 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 committee also said the Trump administration’s continued threats against the US Federal Reserve were putting financial stability at risk.
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“In the US, there has been continued commentary about Federal Reserve independence … 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.”
It said these added to the impacts of Trump’s trade wars, which the FPC said had “not yet been fully realised”.
