Booming AI shares have pushed markets to levels where a sharp fall is now likely, according to a stark warning issued by European Central Bank (ECB) researchers.
In analysis published in a blog post on the ECB’s website on Monday, economists effectively predict a looming stock market “correction” – a term generally used to describe a fall of 10pc to 20pc in valuations.
With stock markets now in and around all-time highs, it would mean losses running into trillions of euro, globally.
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“The extremely optimistic valuations raise questions: do today’s stock market prices reflect a rational bet on the transformative technology? Or are we seeing a remake of the dot-com bubble?” the blog post asks.
“We argue that economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely,” they say.
The research, led by senior economists including Malin Andersson and Stefano Corradin, says US stock markets are most vulnerable, given the outsized share of tech and AI firms there, but says European households are heavily exposed to those US shares.
“The euro area’s smaller, less richly valued tech sector limits the risk of a home-grown crash,” they said.
“But this offers little reassurance: households, insurers and pension funds have significant exposures through global index trackers, and US equity stress has historically also had an impact on euro area stock markets.”
A US triggered stock market plunge would also have knock on effects on business sentiment, credit appetite and the job markets in Europe, they warn.
The report doesn’t take a view on whether the AI technologies that are driving US investor interest higher will ultimately transform economies, and says a correction can happen regardless, citing previous technological breakthroughs including railways in the 19th century, electricity and radio in the 1920s and the “dot-com era” in the 1990s.
“In each case, a genuinely transformative technology attracted investment, and the stock market valuations of firms that adopted it rose strongly before falling sharply,” it said.
“If AI proves to be transformative enough, valuations could still be much higher in the future,” they wrote.
“It is impossible to know in advance where we stand on this path.”
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On the other hand, booming stock markets may simply reflect “overconfident, overoptimistic investors”, the report says.
“When overconfidence fades, prices can fall even more sharply,” it says.
Either way, the historical experience suggests technological revolutions carry risks of a boom-bust cycle in asset prices, regardless, the post says.