The Bank of England on the madness of AI: “stretched” stock market valuations “comparable to the peak of the dotcom bubble”
OpenAI CEO Sam Altman sparked a tech selloff in late August when he mentioned the word “bubble” in response to a reporter’s question. Two months – and several announcements of hundreds of billions of dollars of deals later – Jeff Bezos was talking openly about the markets being in a sort of “industrial bubble,” while insisting that the explosion of investment in artificial intelligence infrastructure would be worth it in the future. Today the Bank of England uses the B-word, albeit in the quiet style typical of a central bank.
In its October 8 quarterly update, the Bank of England’s Financial Policy Committee (FPC) issued a stark warning over feverish investor enthusiasm around AI, saying “equity valuations appear stretched”, particularly in some retrospective measures of US stocks and AI-focused technology companies. Combined with increasing concentration within market indices, the FPC added, equity markets find themselves “particularly exposed if expectations regarding the impact of AI become less optimistic.” Since its last meeting in June, the FPC has noted that valuations of risky assets have increased as credit spreads have compressed, while calling these stretched valuations into question.
Nvidia CEO Jensen Huang defended the large – and, some would say, “circular” – deals at the center of growing talk of an AI bubble, during a September 25 appearance on the 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 that Nvidia believes will be “the next multi-billion dollar hyperscale company.” He said OpenAI would repay Nvidia through its future revenue and sales, which he said are “growing exponentially,” as well as the capital it raises through future stock and debt sales, underscoring his own high level of optimism around AI in general and the OpenAI example in particular.
AI mania and stock market valuations
The Bank of England’s FPC noted that US lookbacks are a particular place to look for stretched valuations, and offered a stark comparison. “For example, the earnings yield implied by the cyclically adjusted price-to-earnings (CAPE) ratio was near a 25-year low, comparable to the peak of the dot-com bubble. » FortuneShawn Tully of , has repeatedly argued in a similar vein that multiples are stretched and the S&P 500 is overconcentrated, writing on September 23 that the index, after flirting with a price-to-earnings ratio of almost 30, actually crossed the line around 3 p.m. ET on September 22. It’s a “terrible omen for investors,” he added.
Regarding concentration, the FPC highlighted how price appreciation among the biggest tech players has propelled concentration within U.S. indexes, with the top five members of the S&P 500 now holding nearly 30% market share, a record high in the last 50 years. Forward-looking price-to-earnings ratios don’t rival the dotcom boom of the 2000s, the FPC added, although they remain surprisingly high.
Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, previously said Fortune she was preparing for a “Cisco” moment, when the dot-com bubble peaked and the stock lost 80% of its value.
Risks of market correction
The FPC’s message comes amid growing global uncertainties – from geopolitical tensions and trade fragmentation to rising sovereign debt risks – which increase the likelihood of a sharp market correction. If investor sentiment toward AI deteriorates, or if progress stalls due to technology bottlenecks or supply constraints, stock prices could fall – and, given the degree of market concentration, such an adjustment would quickly ripple through major market indexes, affecting millions of investors. “The risk of a sharp market correction has increased,” the FPC said.
The FPC highlighted that asset price corrections could have a negative impact on the cost and availability of credit for households and businesses. A sudden change in sentiment in the AI market, or a crystallization of wider global risks, would not only affect tech heavyweights, but could also spill over into wider financial stability concerns, including for the UK as a leading global financial hub.
The FPC did not comment on possible aftershocks in the United States, only noting “continued comments on the independence of the Federal Reserve.” A sudden or significant change in the perception of the Fed’s credibility could lead to a sharp revaluation of the U.S. dollar, and the FPC has signaled the potential for greater volatility and global spillovers.
For this story, Fortune used generative AI to help with a first draft. An editor checked the information for accuracy before publishing it.
