ECB warns of likely AI market correction

The European Central Bank (ECB) has warned that a correction in current stock market valuations is likely, raising concerns about the potential impact of the artificial intelligence-driven technology rally on European households and financial stability. The warning comes as investors have poured money into technology stocks on expectations that AI will transform the global economy, pushing valuations of major U.S. technology companies to levels reminiscent of previous technology booms.

According to an analysis published on the ECB’s blog, the rise of artificial intelligence has triggered a powerful rally in the technology sector, with valuations reaching levels not seen since the dot-com bubble. The economists stressed that a correction could occur even if AI ultimately delivers significant productivity gains and higher corporate profits, as investor expectations may have become excessively optimistic, CE Report quotes ANSA.

The potential risks are particularly significant for Europe. Euro-area households have around €440 billion of exposure to U.S. technology equities, mainly through investment funds and exchange-traded funds, while insurance companies and pension funds also have substantial holdings. The ECB noted that investors may not always be fully aware of the concentration risk associated with their exposure to the so-called “Magnificent Seven” technology companies.

A sharp decline in U.S. technology stocks could therefore spread to European markets. The ECB economists pointed out that U.S. and euro-area stock markets have historically been closely correlated, meaning that a major correction on Wall Street would likely affect European equities as well. A broader sell-off could also affect investor confidence, financing conditions and employment.

At the same time, the ECB analysis stressed that the timing of any correction cannot be predicted. European technology stocks are generally less highly valued than their U.S. counterparts, which limits the risk of a home-grown market crash. However, this would not fully shield Europe from the consequences of a major U.S. technology sell-off.

The economists also warned that policymakers may have less room than during the dot-com crisis to respond to a severe market shock through interest-rate cuts or fiscal measures. The analysis concludes that the potential fallout from an AI-related market correction should therefore be viewed not only as an investment risk but also as a possible financial-stability issue for the euro area.

Photo: META