TL;DR
The Bank of England has warned of a potential “sharp correction” in AI company valuations, citing US equity levels reminiscent of the dotcom bubble. With industry forecasts predicting $5 trillion in AI infrastructure spending—half funded by debt—the central bank says losses could create systemic financial stability risks.
Valuations ‘Particularly Stretched’
The Bank of England’s latest financial stability report has sounded the alarm on AI valuations, warning that share prices in the UK are close to the “most stretched” they have been since the 2008 financial crisis. Equity valuations in the US are described as reminiscent of those before the dotcom bubble burst.
The central bank specifically warned that valuations are “particularly stretched” for companies focused on AI. Industry forecasts suggest spending on AI infrastructure could top $5 trillion (£3.8 trillion) over the next five years, with roughly half coming from outside sources, mostly through debt.
“Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks,” the report stated.
Growing Chorus of Concern
The Bank of England joins a growing chorus of institutions warning about AI market risks. JP Morgan chief executive Jamie Dimon told the BBC in October he was “far more worried than others” about a serious market correction. The International Monetary Fund and Organisation for Economic Co-operation and Development have also flagged concerns.
Governor Andrew Bailey noted that while AI companies differ from dotcom-era firms in having positive cash flows rather than being “created on hope,” concentration remains a risk. “The AI sector in the US is very concentrated, making up a large portion of the value of the country’s stock market,” Bailey observed.
He added: “It doesn’t mean to say everybody is going to win, it doesn’t mean to say everyone is going to win equally.” A drop in share prices could hit pension funds and individual savings.
Looking Forward
The Bank’s report also highlighted broader financial stability risks including geopolitical tensions, trade wars, and rising government borrowing costs. In a separate announcement, the Bank proposed lowering capital requirements for High Street banks—the first reduction since 2008—in a bid to boost lending. The AI market warning comes as Chancellor Rachel Reeves’ Budget encourages savers to move from cash ISAs into stocks and shares, potentially increasing exposure to any correction.
Source: BBC News