ECB warns of AI stock bubble risk in stability review

The European Central Bank (ECB) issued a warning on Wednesday about a potential “bubble” in stocks related to artificial intelligence (AI), which could burst if investors’ high expectations are not met.

This warning was part of the ECB’s Financial Stability Review, highlighting various risks, including geopolitical tensions and banking system vulnerabilities.

The ECB noted that the stock market, especially in the United States, has become increasingly reliant on a few large AI-focused companies.

This concentration raises concerns about an AI-related asset price bubble and the risk of global spillovers if earnings expectations are disappointed.

Investors are currently demanding low premiums to own shares and bonds, while funds have reduced their cash buffers. The ECB warned that low liquidity in investment funds could lead to forced asset sales, amplifying downward price adjustments.

Additionally, the ECB flagged the euro area’s vulnerability to trade fragmentation, particularly following President-elect Donald Trump’s recent election victory and his proposed tariffs.

These measures could potentially harm euro area growth. The ECB also highlighted that euro area governments, especially Italy and France, would face higher borrowing costs in the coming decade, emphasising the need for prudent fiscal policies.

Attribution: ECB, Reuters

Subediting: M. S. Salama