The European Central Bank has warned of a “bubble” in AI-related stocks that could suddenly burst if investors’ rosy expectations do not come true.
This warning came as part of the European Central Bank’s twice-yearly financial stability review, a long list of risks ranging from wars and tariffs to cracks in the pipes of the banking system.
The central bank of the 20 countries that share the eurozone noted that the stock market, especially in the United States, has become increasingly dependent on a small number of companies that are seen as beneficiaries of the artificial intelligence boom.
The European Central Bank said: “This concentration among a small number of large companies raises concerns about the possibility of an AI-related asset price bubble and, in the context of deeply integrated global equity markets, points to the risk of negative global repercussions if earnings expectations are disappointing.” These companies have hopes.”
The European Central Bank noted that investors are demanding a low premium for owning stocks and bonds while funds have reduced their cash reserves.
“Given the relatively low liquid asset reserves and significant liquidity mismatches in some types of open-ended investment funds, a lack of liquidity could lead to forced asset sales, which could amplify downward adjustments in asset prices,” the ECB said.
Among other risks, the ECB noted that the euro zone is vulnerable to further trade fragmentation – a major source of concern for policymakers and investors since Donald Trump won the US presidential election earlier this month.
The president-elect had made tariffs a central plank of his rhetoric to voters during the election campaign, and several ECB policymakers said such measures, if implemented, would hurt growth in the eurozone.
The ECB also noted that eurozone governments – especially Italy and France – will borrow at much higher interest rates over the next decade, reinforcing the need for prudent fiscal policies.
