The United Kingdom’s monetary regulator has warned of increasing risks of a “sharp market correction” amid the overvaluation of AI companies and threats to the independence of the Federal Reserve, reports Bloomberg.
In its quarterly financial stability report, the Bank of England noted that asset values continue to rise while credit spreads narrow. This occurs against a backdrop of “persistent significant uncertainty regarding global macroeconomic prospects.”
The regulator believes that stock markets are overvalued, particularly in the technology sector working with artificial intelligence. This sector is most vulnerable if “expectations regarding the impact of AI become less optimistic.”
Concerns about the formation of a bubble in the artificial intelligence sector have intensified amid record growth in American stocks: the Nasdaq 100 index has gained 18% since the beginning of the year.
Daily chart of the Nasdaq index. Source: TradingView.
Market excitement has drawn comparisons to the dot-com bubble of the late 1990s, which ended in a crash and a series of bankruptcies. However, not all market participants share this pessimism. Analysts at Goldman Sachs believe that investor position indicators point to sustained optimism and expectations of further growth.
The Bank of England pointed to “significant bottlenecks” in the development of artificial intelligence that could affect company valuations. These include shortages of electricity, data, or resources and conceptual breakthroughs that could change perceptions of the infrastructure needed for AI operations.
Another threat comes from the United States Federal Reserve. The agency’s independence has come under pressure following Donald Trump’s attempts to change the board’s composition and his regular attacks on Jerome Powell and his monetary policy.
“The operational independence of the central bank is fundamental to financial stability. A sudden or significant change in the perception of the Federal Reserve’s reliability could lead to a sharp reassessment of the value of dollar assets, including the US government debt market, causing increased volatility, risk premiums, and a range of global consequences,” states the Financial Policy Committee’s meeting minutes.
Such developments could negatively impact global markets, as borrowing rates in other countries often correlate with those in the United States.
In October, OpenAI became the world’s most valuable private company with a valuation of $500 billion.