Record-High Stocks Face Growing Risks
U.S. and European stocks are reaching record levels as investors pour money into artificial intelligence, but economists at the European Central Bank warn that the current rally could eventually give way to a sharp correction.
In a Monday blog post, ECB economists said historical examples of major technological shifts suggest that current stock valuations are likely to fall at some point.
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One possible scenario is that excessive optimism pushes AI-related stocks above their fundamental value before investor confidence fades. Even if today’s valuations accurately reflect AI’s potential to transform the economy and increase corporate profits, the economists said a correction could still follow.
AI Boom Echoes Earlier Technology Waves
The ECB analysis compares the current AI investment cycle with past periods of rapid technological change, including the 19th-century railway boom, the expansion of electricity and radio in the 1920s, and the rise of the internet in the 1990s.
As new technologies become more widely adopted, uncertainty can spread across the broader economy. A major setback in the technology could then increase investors’ risk concerns and put downward pressure on stock prices, even if corporate profits remain strong.
According to the economists, these cycles typically involve a boom followed by a correction, potentially followed by another period of growth. However, they stressed that the timing of such a downturn cannot be predicted in advance.
Europe Could Be Particularly Exposed
European retail investors could face significant losses because global index and pension funds have substantial exposure to the so-called “Magnificent 7” U.S. technology companies.
A severe market correction could also create broader financial risks through investment funds and potentially affect euro-area stability. The ECB economists warned that policymakers may have less room than during the dot-com crash to respond, with fewer options to cut interest rates or use fiscal measures to cushion the impact.
