BIS warns of vulnerability in AI-related stock rally
Taiwanese outlet Taipei Times reported that the Bank for International Settlements (BIS) sees growing signs of vulnerability in the global rally in artificial intelligence-related stocks. Investors are becoming more cautious about the returns on future AI investments, particularly because of rising leverage among major U.S. technology companies.
Frank Smets, head of economic analysis at the BIS, said that the AI momentum that supported stock markets and the resilience of the global economy over the past year has begun to show increasing signs of vulnerability.
Debt and opaque financing
The BIS noted that hundreds of billions of dollars in debt raised by companies in the AI sector could also affect rising government bond yields. This comes amid concerns about the sustainability of debt levels, strained public finances, geopolitical tensions, and volatile energy prices.
According to Smets, the BIS is most concerned about the rapid growth of debt and leverage, as well as the opacity of many financing arrangements. He said such deals often remain off balance sheet and may be cyclical in nature.
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Technology companies' aggregate borrowing rose from about $22 billion, or 22% of total private credit, in 2010 to more than $1 trillion, or 44%, last year. The total amount of outstanding loans to technology companies of all types stood at nearly $2.5 trillion.
Market resilience in question
Shares in AI-related companies fell sharply after executives at several leading companies in the sector warned that the pace of the technology's development should be slowed because of threats to humanity.
At the same time, Smets said that overall there are no signs of stress, and investors' appetite for risk has remained surprisingly resilient in recent months. However, he stressed that it is unclear whether this resilience will persist if pressure on bond yields intensifies.
A separate BIS study using AI analyzed thousands of central bank speeches and reports. It showed that measures of core inflation, which exclude fluctuations in energy prices, are mentioned more often and in greater variety. The BIS noted that the growing complexity of central bank communication may make effective communication with the public more difficult.
