Bank of England warns AI stock bubble resembles dotcom peak
The Bank of England has issued its strongest warning yet about an potential AI-driven market bubble, comparing current US stock valuations to those at the height of the 2000 dotcom era. The central bank highlighted extreme market concentration and risks of a sharp correction if investor sentiment on AI sours. Spillover effects to Britain's financial system could be material, according to the report.
In its quarterly Financial Stability Report, released on Wednesday following a committee meeting last week, the Bank of England (BoE) cautioned that global financial markets face heightened risks from an AI stock bubble. The report, chaired by Governor Andrew Bailey, states that "the risk of a sharp market correction has increased." This marks the BoE's most direct alert on potential AI-fueled declines, as noted by Reuters.
US equities show valuations akin to the dotcom bubble's peak on certain metrics, with AI-focused firms comprising an unprecedented share of market value. The S&P 500 reached a record high on Tuesday, up 14 percent year-to-date, but 30 percent of its valuation stems from just five companies—Nvidia, Microsoft, Apple, Amazon, and Meta—all major AI investors. This is the most concentrated the index has been in 50 years.
Share prices relative to past earnings hit levels not seen since the 2000 dotcom bubble, 25 years ago, though they appear less stretched against future profit expectations. The BoE warned: "This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic."
The dotcom parallel is stark: the Nasdaq surged 600 percent from 1995 to March 2000 before plummeting 78 percent to its October 2002 low. While AI's utility is not in question—much like the internet's—the concern is whether investments match realistic profit potential. The BoE emphasized material spillover risks to the UK's financial system from any such shock.