Bank of England Warns of Potential Market Turmoil Amid AI Valuation Surge
The Bank of England has cautioned about an increasing risk of a "sudden correction" in global markets, highlighting concerns over rapidly rising valuations of major AI-focused technology firms.
Officials noted additional threats, including a potential "sharp repricing of US dollar assets" if confidence in the Federal Reserve weakens among international investors. This follows repeated criticism of the US central bank by Donald Trump, raising questions about its independence.
Enthusiasm over AI's future prospects has driven company valuations higher in recent months. For instance, OpenAI’s estimated worth has climbed to $500bn (£372bn), up from $157bn last October. Another firm, Anthropic, saw its valuation nearly triple from $60bn in March to $170bn last month.
However, the Bank of England’s Financial Policy Committee (FPC) stated on Wednesday: “The risk of a sharp market correction has increased.”
“By several measures, equity market valuations appear elevated, especially for AI-focused technology companies. This could leave markets vulnerable if expectations around AI’s impact become less optimistic.”
The FPC warned that investors may not be fully accounting for these risks, adding that “a sudden correction could occur” if they materialize, potentially reducing funding availability for households and businesses. The committee noted: “As an open economy with a leading financial center, the UK is exposed to spillover effects from such global shocks.”
Doubts over the AI sector have grown following research from the Massachusetts Institute of Technology indicating that 95% of organizations have seen no returns from investments in generative AI. This has raised fears that stock market valuations could decline if optimism about AI’s progress fades.
The FPC stated that such a shift “could drive a re-evaluation of currently high expected future earnings.”
It added: “Significant constraints on AI development—such as shortages in energy, data, or key supplies—as well as major breakthroughs that alter infrastructure demands for powerful AI models, could also negatively affect valuations, including for firms banking on heavy AI-related investments.”
The FPC also warned that ongoing political challenges to Federal Reserve independence in the US could undermine financial stability.
“Recent statements questioning the Federal Reserve’s autonomy… could, if perceptions shift abruptly, lead to sharp adjustments in the value of US dollar assets, including government debt, potentially causing higher volatility, increased risk premiums, and global repercussions.”
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