The United States could be heading for a stock market crash that would make UK households poorer, the Bank of England has warned. It raised fears that the US could be in the midst of a “bubble” after shares in AI-related industries soared. A similar “dot-com bubble” in the 1990s, when investors hoped the growth of the internet would lead to massive profits, was followed by a dramatic decline in the value of technology stocks.
The Bank of England said a “sharp correction”, meaning a fall in share prices, was possible and referred to the crash in the UK stock market in 2008. It warned: “Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis. This heightens the risk of a sharp correction.”
US tech stocks have soared because investors hope AI technology will lead to massive profits in the future. Firms such as NVIDIA, which creates computer processors, and Alphabet, parent company of Google, have risen significantly in value.
But this increase is driven by “high expected future earnings growth over several years” according to the Bank of England’s Financial Stability Report, rather than current profits. Some firms have also taken on huge debts, to help fund research into new technology.
If the hoped-for profits fail to materialise then a “sharp repricing” of share prices is possible, according to the Bank. This would mainly affect US firms, but by making America poorer it would have an impact across the world.
The Bank of England report said: “UK equities typically co-move with other global equity indices and so could fall in such a scenario even though their direct AI exposure is lower. Any significant fall in equity prices could reduce UK household wealth and subsequently consumption.”
It warned: “Any sharp repricing of AI-related equities which weakened US demand could in turn also reduce demand globally.”
In addition, UK households that own shares traded on US stock markets such as the Nasdaq would be directly affected, as the value of their investment fell.
Experts are divided on whether the US is in the midst of a “bubble” or not, after the Nasdaq rose by 21% over the past year.
The Bank also said that the UK banking system remains sturdy enough to support households and businesses even if economic conditions got substantially worse.