The Bank of England has issued a caution to global investors, suggesting they have not fully accounted for the risks associated with the booming artificial intelligence market. The bank’s Financial Policy Committee warned that the chance of a “sharp market correction has increased,” driven by “stretched” valuations in the AI tech space and a failure to price in potential downsides.
Policymakers pointed to the soaring worth of AI-focused companies as a key area of concern. With firms like OpenAI and Anthropic reaching valuations of $500 billion and $170 billion, respectively, the FPC believes the market is being fueled by an optimism that could easily be punctured. A sudden shift in sentiment away from AI could lead to a rapid collapse in these stock prices.
The Bank’s warning is supported by evidence that the AI revolution is not yet yielding widespread profits. A notable study from MIT found that 95% of organizations investing in generative AI are currently seeing zero return. This stark reality contrasts sharply with the high future earnings expectations baked into current stock prices. The FPC also highlighted potential “material bottlenecks,” such as power or data shortages, that could disrupt AI development and harm valuations.
Beyond the specific risks in the tech sector, the committee also raised the alarm about growing political threats to the US financial system. Donald Trump’s continued attacks on the independence of the Federal Reserve are seen as a significant source of instability. The FPC warned this could lead to a loss of credibility for the central bank.
Such an event could trigger a “sharp repricing of US dollar assets,” sending waves of volatility across the globe. The FPC was clear that the UK would not be insulated from this fallout. The “risk of spillovers to the UK financial system from such global shocks is material,” potentially leading to a freeze in lending that would affect both businesses and households.
Investors Overlooking Risks of AI Bubble, Bank of England Cautions
