Bank of England sounds alarm on ‘high risk’ AI bubble
The Bank of England has warned of the potential for a “sharp correction” in global markets due to the “stretched” stock valuations from the artificial intelligence (AI) boom.
The central bank’s Financial Policy Committee has warned a crash in the roaring value of US tech giants could spark trouble overseas.
“A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre,” the said in its latest update analysing the state of the financial ecosystem.
The group said the current state was “comparable to the peak” of the dot com bubble, which began in 1995 and burst five years later, triggering steep losses for investors.
“A sharp correction could interact with vulnerabilities in the system of market-based finance, adversely affecting the cost and availability of finance for households and businesses,” it added.
However, deals across the sector have continued with just this week OpenAI signing a multi-billion dollar deal with chip giant AMD to build large scale data centres as the AI arms race powers on.
OpenAI alone is currently involved in $1tn worth of deals with the likes of Oracle, a $300bn fixture, and CoreWeave at $22bn.
Equity analysts at Barclays said “a liquidity glut and AI boom” were keeping the “party going for equities”.
“Mindful of the froth post such a strong rally, we still see momentum pushing higher,” they added.
The analysts said “FOMO” – fear of missing out – was “In full swing” on the AI boom and had fuelled the buying spree in September.
But they warned an “AI spending frenzy and circular funding” had raised “bubble concerns”.
Lale Akoner, global market analyst at eToro, told Morning Wire: “If sentiment turns, an AI-led sell-off could ripple across global markets.
“Given the heavy weighting of these stocks in major indices and credit markets, a correction could hit not just tech, but portfolios, funding conditions, and confidence more broadly.”
Rachel Reeves bets on AI for growth
Such a correction would mark a major headache for Chancellor Rachel Reeves, who just last month bet heavily on US tech giants to help grow the UK economy.
Tech titans from across the Atlantic pledged over £30bn in AI and cloud investments across the UK during President Donald Trump’s state visit.
Microsoft earmarked £22bn to build the country’s largest supercomputer and AI infrastructure. Meanwhile chipmakers Nvidia and OpenAI laid out plans to create the largest AI computing facility in Europe.
Following the announcement, Nvidia chief Jensen Huang told Morning Wire: “We’re going to improve productivity, we’re going to expand markets, we’re going to create new product lines”.
But the risk of a sharp correction – which the Bank of England said remains “high” – could derail these ambitions.
The unprecedented market concentration – with the market share of the top five members of the S&P 500 at a 50-year high of 30 per cent – has been cited as a top cause of concern.
The committee said condensed concentration and booming stocks left “equity markets particularly exposed should expectations around the impact of AI become less optimistic”.
However, some economists have said if the soaring AI trend did snap, it could narrow the valuations gap between UK and US stock markets.
Joe Maher, market economist at Capital Economics, said: “If the AI bubble were to burst, we suspect the gap in valuations would shrink significantly but it would not disappear.”
Martin O’Sullivan, tech equity analyst at Shore Capital, told Morning Wire: “A short-term reset in valuations wouldn’t erase the structural growth potential of AI, especially as adoption matures and monetisation becomes more visible.”