Bank of England on AI mania: “Stretched” stock valuations similar to the peak of the dot-com bubble”

In it Quarterly update On October 8, the Bank of England Financial Policy Committee (FPC) issued a stark warning about the frenetic investor enthusiasm surrounding AI, saying that “stock valuations appear stretched,” particularly in some reactionary metrics in US stocks, especially AI-focused technology companies. The committee added that when combined with increasing concentration within market indices, equity markets find themselves “particularly vulnerable if expectations around the impact of artificial intelligence become less optimistic.” Since its last meeting in June, the Financial Policy Committee has noted that risk asset valuations have increased as credit spreads have compressed, as it has questioned these extended valuations.

Nvidia CEO Jensen Huang defended The big one, some might say:circular— the deals at the heart of the growing talk about the AI ​​bubble, during a September 25 appearance on Channel Bg2 podcast With Brad Gerstner and Clark Tang. He said Nvidia’s $100 billion deal with OpenAI was an “opportunity to invest” in a company Nvidia He believes it will be “the next multi-trillion scale company.” He said OpenAI will once again pay Nvidia through its future revenue/revenue, which he noted is “growing significantly,” as well as the capital it raises through future equity and debt sales, underscoring his high levels of optimism around AI in general and the OpenAI example in particular.

Artificial Intelligence obsession and market valuations

The Bank of England FPC noted that US retroactive benchmarks are one particular place to look for extended valuations, and provided a striking comparison. “For example, earnings yields indicated by the CAPE ratio were close to a 25-year low – comparable to the peak of the dot-com bubble.” luckSean Tully He has repeatedly argued in a similar vein that multiples are stretched and that the S&P 500 is overconcentrated, writing as recently as September 23 that the index, after flirting with a price-to-earnings ratio to almost 30actually crossed the line at approximately 3:00 PM ET on September 22. “It’s a terrible omen for investors,” he added.

Regarding concentration, the FPC highlighted how rising prices among the largest technology players have driven concentration within US indices, with the five largest members of the S&P 500 now controlling nearly 30% of market share, a record high for any point over the past 50 years. The FPC added that forward-looking price-to-earnings ratios do not rival the dot-com boom of the 2000s, although they are still strikingly high.

Morgan Stanley Lisa Shalit, chief investment officer at Wealth Management, said earlier luck It was preparing for the “Cisco” moment, when the dot-com bubble peaked and this stock continued to lose 80% Of its value.

Market correction risk

The MPC’s letter comes amid rising global uncertainties – from geopolitical tensions and trade fragmentation to rising sovereign debt risks – raising the possibility of a sharp market correction. If investor sentiment around AI worsens, or if progress stalls due to technological bottlenecks or supply constraints, stock prices may decline – and given the degree of market concentration, such an adjustment would quickly spread across broad market indices, affecting millions of investors. “The risk of a sharp market correction has increased,” the MPC said.

The Financial Policy Committee stressed that asset price corrections could negatively impact the cost and availability of credit to households and businesses. A sudden shift in AI market sentiment, or the crystallization of broader global risks, would not only impact technology heavyweights, but could spill over into wider financial stability concerns, including the UK as a leading global financial centre.

The Monetary Policy Committee did not comment on possible aftershocks in the United States, other than to point out “ongoing commentary on the independence of the Fed.” Any sudden or major change in perceptions of the Fed’s credibility could cause the US dollar to undergo a sharp repricing, and the MPC has flagged the potential for higher volatility and global ramifications.

For this story, luck Use generative AI to help with the rough draft. An editor verified the accuracy of the information before publication.

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