ECB says fear of missing out may be accelerating the rise of AI

AI-related stock valuations may be driven by the fear of missing out, known as FOMO, but strategists say now is not the time to remain calm.

Global stock prices remain elevated, the European Central Bank said in its Financial Stability Review on Wednesday. At the same time, concentration among a small group of interconnected US hyperscalers is also increasing, making the market vulnerable to sharp corrections, it warned.

Hyperscalers typically refer to AI-related technologies such as: Nvidia, alphabet, microsoft and Meta.

“Current market prices do not appear to reflect continued vulnerability and uncertainty,” the study said.

Investors may be driven by “optimism that tail risks will not materialize,” he added, but the move may also “reflect concerns about missing out on continued upside as markets have proven resilient to recent shocks.”

The strategists noted that there is some FOMO in the market, but believe there is still real value in some AI efforts.

The ECB’s review aims to highlight potential risks to financial stability, said Julien Lafargue, the ECB’s chief market strategist. barclays Private Banks and Wealth Management noted that “even if the probability of such risks materializing is low”.

He told CNBC that valuations are “not cheap,” but companies are delivering growth, and he called for differentiation between certain sectors. Lafargue pointed to quantum computing companies, saying there is a big risk in companies that have not yet turned a profit but are benefiting from rising stock prices.

“In these cases, investor positioning appears to be driven more by optimism than by tangible results,” he said.

“In short, while some valuations may be driven by ‘FOMO’, others are underpinned by abnormal profit growth, so differentiation is key,” he added.

The ECB’s review comes after a rollercoaster of weeks for global stock markets, with Nvidia’s earnings buoying depressed stock markets weighed down by cyclical trading, bond issuance and high valuations. The tech giant’s stock price initially soared following the results, but quickly reversed.

The market is buzzing about whether there is an AI-powered investment bubble, with one investor even going so far as to say that “everything is a bubble.” Ray Dalio, founder of Bridgewater Associates, expressed concern, Larry Fink of BlackRock argued for the need to cut big checks for AI infrastructure, and Cathie Wood of Ark Investos dismissed the idea of ​​a bubble.

By contrast, the ECB is the latest in a string of central banks to issue warnings, having previously been warned by the Bank of England and the International Monetary Fund.

The European Central Bank did not say whether it believed a bubble had formed, but it did note similarities between the dot-com boom and bust. “However, the current high valuation appears to be supported by a very strong earnings performance.”

Still, “market sentiment could change sharply not only if the growth outlook deteriorates, but also if earnings in the technology sector, especially those of artificial intelligence companies, fall short of expectations,” ECB Vice-President Luis Deguindos said in a report.

Nonbank financial intermediaries in the euro area are likely to face losses in such a scenario due to their concentrated exposure to the United States, DeGuindos said, adding: “Liquidity mismatches in open-end investment funds, pockets of high leverage among hedge funds, and uncertainty in private markets could exacerbate market stress.”

The Magnificent 7 stocks (Alphabet, Amazon, Apple, Tesla, Meta, Microsoft, and Nvidia) are currently up 24% since the beginning of the year. Cryptocurrencies are volatile, and Bitcoin and Ethereum have been particularly hard hit this month.

“Ultimately, the ECB has a point,” said Michael Field, chief equity strategist at Morningstar. The strategist said the seven Magnificent stocks make up 40% of the Morningstar US Index, a dangerous level of concentration, adding: “The fact that all seven stocks have significant exposure to AI themes poses additional risks.”

Still, the company sees signs of improvement for most of these big names. teslaBut Field said it was “overvalued by more than 50%.”

“As the ECB comments, it’s hard to deny that other stocks exposed to the AI ​​theme are not overvalued. Britain’s darling ARM Holdings is trading at almost 90 times projected 2026 earnings, twice that of Nvidia. This is certainly a risk,” he added.

“So should we panic and start selling the market now? The answer is no. But it’s important to be aware of the inherent risks and avoid getting swept up in FOMO as stock prices continue to rise,” Field said.

For Wedbush’s Dan Ives, the market is not a bubble. He told CNBC that this is the third year of an eight to 10-year build toward an AI revolution. He believes “this tech bull market” has two years left before it slows down rather than explodes.

“AI Party time is 10.30pm and will run until 4am. The ECB will be watching from outside through the window,” Ives said.

He added: “Europe is in a time capsule of innovation with cryptocurrencies, and it’s been a frustrating time for many of the region’s technology investors and entrepreneurs we spoke to during our global travels.”