ECB experts warn that the AI bubble is close to bursting

BarcelonaThe artificial intelligence has been the engine of stock market success in recent years. The tech companies leading the AI market have reached unimaginable heights, to the point that the club of companies worth over a trillion dollars is no longer an exclusive affiliation. Nvidia exceeds $5 trillion in market capitalization, while both Amazon, Alphabet (Google), and Apple are above four trillion.

Investors' unlimited gains, however, do not necessarily suggest a rosy future: according to a recent publication on the European Central Bank's blog, a fall is imminent. "A correction of current stock market valuations is likely," assure several economists from the European monetary regulator in an article on the institution's official page. It should be remembered that the opinions of the central bank's researchers on the blog do not necessarily represent the official positions of the regulator.

The authors of the report identify in the AI stock market boom similar patterns to other moments of technological disruption in the last century, from the expansion of the railway in the 19th century to the dot-com bubble.dotcom on the internet of the 90s and 2000s. As in those cases, experts point to "excessive optimism" in investors that "drives up company valuations" beyond their results.

A clear case could be that of Elon Musk's tech company SpaceX, who shot the share price just days after its stock market debut despite the millionaire losses it communicated to the market. "When investors' excess confidence fades, prices fall more sharply than in a rational scenario," economists warn.

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Experts, it must be said, point out that a downward correction in AI on the stock market will not necessarily mean a failure of the technology. "If artificial intelligence is transformative enough, valuations could be even higher after the correction," they argue; while acknowledging that "it is impossible to know in advance if we are on this path." More certain, in their eyes, will be the earthquake that a bursting of the bubble would cause on European economies.

The great danger is the exposure of private EU investors to large North American technology companies –the so-called "Magnificent 7–; which dominate global stock market indices. According to the calculations of central bank economists, private savers in the 27 countries concentrate around 440 billion euros in investment in these companies, mainly through financial products that replicate major stock market indices (ETFs). European insurers and pension funds would also be highly exposed, both with technological investments around 200 billion euros.

This exposure means that a crisis in technology stock valuations is, in the eyes of the publication's authors, "a matter of financial stability for the eurozone, and not just a private problem." Furthermore, they emphasize, the room for regulatory maneuver is much lower than during the "dot-com bubble: "The current scenario leaves much less room for maneuver to cut interest rates or use fiscal policy to cushion the fall," they allege.

In this regard, a sharp cut in the valuations of large technology companies in the US "would not be solely an American problem." Although European stock markets are markedly less dependent on the AI euphoria –due to the practical absence of European champions in this field–, the exposure of local investors to US assets is high enough to worry experts. Moreover, the health of European markets has historically been correlated with North American ones; and a crash like the one they foresee could "extend beyond financial markets, towards financing conditions or hiring."