Bank of England, Royal Exchange and Duke of Wellington statue in the City of London, London, UK, February 19, 2025.
Mike Kemp | In Photography | Getty Images
The Bank of England said on Wednesday that the valuations of tech companies, particularly those focused on artificial intelligence, appeared to be inflated, warning that the risk of a “sharp market correction” was rising.
The central bank is the latest in a long list of banks and investors to consider whether an AI bubble is forming as markets enter the fourth quarter.
In its latest meeting minutes, the Bank of England said rising geopolitical tensions, fragmentation of trade and financial markets and pressure on sovereign debt markets were impacting risks.
“This crystallization of global risks could have significant implications for the UK as an open economy and global financial center,” the report said.
The Bank of England said stock market valuations are near record highs, thanks in part to strong second-quarter profits from U.S. tech companies.
“The market share of the top five companies in the S&P 500 reached nearly 30%, higher than at any point in the past 50 years,” the report said, noting that valuations for AI-focused tech companies appear particularly overvalued.
“Equity markets will be particularly at risk if expectations about the impact of AI become less optimistic, coupled with increased concentration in market indexes,” the minutes said. He added that expectations for future revenue growth are so high that any pullback on AI bets could have a knock-on effect.
Investors are keeping an eye on AI stocks as earnings season begins, and some strategists believe tech companies’ valuations are driven by sound fundamentals. Goldman Sachs also remained cautiously optimistic in its latest report, believing a bubble has not yet formed, but heeding a warning to investors to “diversify.”
Meanwhile, Federal Reserve Chairman Jerome Powell on Tuesday warned of “fairly high value” assets, although he did not specifically mention technology companies.
The Bank of England further warned that “downside factors could include disappointing AI capabilities/adoption progress or increased competition, which could prompt a reassessment of currently expected future returns.”
“Significant bottlenecks to AI advancements, such as power, data, and commodity supply chains, as well as conceptual breakthroughs that change the anticipated AI infrastructure requirements for the development and use of powerful AI models, could also undermine valuations, including for companies with expected returns from anticipated high levels of AI infrastructure investment,” the report added.
Meanwhile, the private credit market has been depressed recently following news that automaker First Brands and auto finance company Tricolor have filed for bankruptcy. Meanwhile, political uncertainty in France and Japan remains, and questions about US President Donald Trump’s intervention at the Fed remain, further bleaking the Bank of England’s outlook.
The Bank of England said the changing risk landscape has “increased the risk that markets have not fully priced in the possible adverse effects, and a sudden correction could occur if any of these risks materialize”.
That could have a knock-on effect on households and businesses in markets already feeling the pinch from high living and borrowing costs, it added.
