Global financial markets could face a severe downturn if investor confidence in AI or the independence of the U.S. Federal Reserve weakens, according to the Bank of England (BoE).
In its latest Financial Policy Committee (FPC) quarterly update, the central bank warned that the risk of a “sharp market correction has increased”, particularly as market valuations and geopolitical tensions reach precarious levels, claims Reuters.
The BoE said U.S. equity valuations have reached levels reminiscent of the late 1990s dotcom boom. It noted that share prices for major technology firms such as Nvidia, Microsoft, Apple, Alphabet, Amazon, and Meta now make up around 30% of the S&P 500’s total value — the highest level of concentration in over half a century. This concentration, combined with speculative optimism about AI, has created a potential bubble that could burst if investor sentiment turns.
“The risk of a sharp market correction has increased,” the BoE’s FPC said, adding that “markets are particularly exposed should expectations around the impact of AI become less optimistic.” The FPC, chaired by BoE governor Andrew Bailey, focuses on safeguarding financial stability across the UK. Bailey recently told the UK parliament that he was “very concerned” about political threats to the Federal Reserve’s independence, particularly given attempts by former U.S. President Donald Trump to pressure the central bank to cut interest rates and remove key policymakers.
The BoE cautioned that “a sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of U.S. dollar assets, including in U.S. sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers.” Such a scenario could quickly push up global borrowing costs, including those for the UK government, whose debt yields closely follow U.S. Treasury movements.
Yields on 30-year UK gilts recently reached their highest levels since 1998, while shorter-term borrowing costs have also risen. The BoE attributed this to concerns about growing fiscal pressures across advanced economies and political uncertainty in markets such as France and Japan.
The Bank added that the boom in AI-linked stocks may be particularly vulnerable if companies fail to meet sky-high earnings expectations. While current valuations appear slightly more grounded than during the dotcom era when adjusted for future profit forecasts, the BoE said the speed and scale of capital flows into AI technology leave markets susceptible to sudden corrections.
The warning comes as global investors grapple with questions about how sustainable the AI-driven rally is and whether political interference in central bank policy could spark broader financial instability. With AI dominating investor portfolios, even a small shift in sentiment could have major global consequences.
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