ECB warns: Correction in AI stocks likely, exposure 440 billion euros
Economists at the European Central Bank warn in a new blog that US tech stock prices have reached levels reminiscent of a bubble, and the consequences could be far-reaching.
Economists at the European Central Bank warn in a new blog that US tech stock prices have reached levels reminiscent of a bubble, and the consequences could be far-reaching.
Economists at the European Central Bank (ECB) have published a blog warning that a correction in the US tech stock market is likely, as reported by Tportal citing Reuters. The warning comes at a time when the market valuations of the largest tech companies are far above historical averages, fueled by expectations that artificial intelligence will fundamentally transform the global economy.
The blog's authors, five ECB economists, note that the text does not necessarily reflect the official views of the institution, but their analysis carries a serious warning for global markets.
The ECB blog states that economic research on past technological revolutions points to a troubling conclusion. "Economic research on past technological revolutions points to a troubling conclusion: a correction in current stock market valuations is likely," the text reads.
According to the economists, even if the technology delivers on its promised results and corporate profits increase, stock prices could still fall due to the difficulty of meeting overly optimistic market expectations about earnings growth. The risk is further amplified by psychological factors: when investors are excessively optimistic, they push prices above realistic levels, and when that optimism fades, prices often fall more sharply than they would in a rational scenario.
For Europe, a market correction in the US is a matter of financial stability. European households have exposure worth 440 billion euros to the shares of the so-called "Magnificent Seven" - Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. Pension funds and insurance companies have a similar level of exposure to these stocks.
Although stock valuations on European exchanges appear more moderate, movements in European markets are closely linked to those on US exchanges. Therefore, domestic stock prices will also fall if a correction occurs, the ECB economists note.
Particularly concerning is a scenario in which a correction coincides with broader market instability. "The more severe scenario is not the market correction itself, but a correction that occurs simultaneously with broader market instability that policymakers cannot easily soothe: unlike the 'dot-com' episode, today's starting point leaves considerably less room for cutting interest rates or using fiscal policy to mitigate the consequences," the ECB blog states.
The economists acknowledge that the exact timing of a correction "cannot be known in advance" and that "such boom-and-bust patterns can only be identified in hindsight." However, it is clear that the risks have been recognized at the highest level of European monetary policy.
