The Bank of England has warned that the risk of a sharp correction in the stock market is growing, with market valuations now looking too high, especially in AI-based technology sectors. The bank stressed that geopolitical tensions, government debt pressures and volatile global markets are adding systemic risk to the UK economy.
The BoE highlighted that the five largest companies in the S&P 500 now control almost 30% of the market and that AI companies’ valuations are seen as “too high.” If expectations for AI turn negative, the impact could trigger a sharp drop in stock prices.
Financial institutions such as Goldman Sachs have insisted that there is no full-blown AI bubble yet but are advising investors to be cautious and diversify their portfolios. Meanwhile, Fed Chairman Jerome Powell has also acknowledged that assets are now “relatively overvalued.”
The BoE also added that obstacles to AI progress including shortages of energy, data and raw material resources could weigh on the valuations of companies that rely on large AI infrastructure investments.
In addition, problems in private credit markets and political uncertainty in France, Japan and the US are also increasing global market risks. The BoE warned that if these risks materialise, the UK, already burdened by high living costs, could face a double whammy for households and businesses.
