Bank of England Warns AI Equity Valuations Appear Stretched

TL;DR: The Bank of England’s Financial Policy Committee has warned that equity market valuations appear stretched, particularly for AI-focused technology companies. The Committee highlighted that US equity market concentration has reached record levels, with the top 5 S&P 500 members representing nearly 30% of the index—higher than at any point in the past 50 years.

The Bank of England has flagged significant risks around artificial intelligence equity valuations in its October 2025 Financial Policy Committee record, noting that technology stocks are trading at levels that imply high future earnings growth. The Committee warned that any downward revision of AI expectations could trigger substantial market corrections due to increasing concentration within major indices.

Context and Background

On a number of measures, equity valuations appear stretched, particularly in the US technology sector. The S&P 500’s Cyclically-Adjusted Price-to-Earnings ratio has reached levels comparable to the dot com bubble peak, with earnings yields at their lowest in 25 years. Forward-looking metrics show the S&P 500 trading at 25 times earnings, with some AI-focused companies commanding valuations that assume sustained high growth.

The Committee identified several downside risk factors that could drive re-evaluation of current valuations, including disappointing AI capability progress, increased competition, or material bottlenecks in power, data, or commodity supply chains. Conceptual breakthroughs that change anticipated AI infrastructure requirements could also impact companies whose revenue expectations depend on high levels of infrastructure investment.

Looking Forward

Despite these concerns, the FPC maintained the UK countercyclical capital buffer rate at 2%, judging that the UK banking system has sufficient capacity to support households and businesses even under substantially worse economic conditions. The Committee noted that whilst global risks remain elevated, UK households and corporates continue to demonstrate resilience despite pressures from higher debt servicing costs.

The FPC emphasised that sudden corrections could interact with vulnerabilities in market-based finance, potentially affecting credit availability and costs. As an open economy with a global financial centre, the UK faces material spillover risks from global financial shocks.

Source Attribution:

Share this article