ECB economists have warned of a possible market correction amid the AI boom
Economists at the European Central Bank have warned that high stock market valuations amid the artificial intelligence boom are likely to face a correction. In their view, such a scenario is possible even if current stock prices truly reflect AI’s ability to transform the global economy and boost corporate profits, according to CNBC.
In an ECB blog post, the economists outlined two possible explanations for a future downturn. The first is that overly confident and optimistic investors may drive stock prices above their fundamental value. A waning of this enthusiasm could eventually trigger a sharp drop in prices.
The second scenario involves a correction even based on reasonable valuations. As the technology spreads, uncertainty about its success becomes a problem for the entire economy. If the technology encounters difficulties, it could affect the economy as a whole. According to the authors of the analysis, under such conditions, investors will demand a higher risk premium, which will ultimately put downward pressure on stock prices, even if companies’ profits continue to grow.
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Economists drew parallels with the 19th-century railroad boom, the spread of electricity and radio in the 1920s, and the development of the internet in the 1990s. According to their observations, in each of these cases, investor concerns about the success of technological changes extended beyond individual companies and affected the broader economy.
The authors of the analysis noted that it is impossible to predict the exact timing of a potential correction, and that market cycles of growth and decline become apparent only in hindsight. They also pointed out the significant vulnerability of European retail investors: shares of the “Magnificent 7” companies carry significant weight in global index and pension funds.
Economists warn that a sharp correction could spread through fund-related structures and pose risks to the stability of the eurozone. Compared to the dot-com crash, there are now far fewer options to mitigate the effects of the downturn through interest rate cuts or fiscal measures, they noted.
