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 where the club of companies worth more than a trillion dollars is no longer an exclusive affiliation. Nvidia exceeds $5 trillion in market capitalization, while both 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, titled The AI boom: rational enthusiasm or the next dot-com bubble? the fall could be 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 to the internet of the 90s and 2000s. These processes, they recall, are marked by "excessive optimism" from investors that "drives up company valuations" beyond their results.

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

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Experts, in fact, 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 can be even higher after the correction," they argue; although they acknowledge 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 bubble burst would cause on European economies.

The great danger is the exposure of private investors in the EU to large North American technology companies – the so-called "Magnificent 7–; which dominate global stock market indices. According to the calculations of the central bank's economists, private savers in the 27 countries concentrate about 440 billion euros in investments in these companies, mainly through financial products that replicate the main stock market indices (ETFs). Insurance companies and community pension funds would also be highly exposed, both with technological bets 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 euro area, and not just a private problem." Furthermore, they emphasize, the regulatory leeway 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 a solely 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 those of North America; and a crash like the one they foresee could "extend beyond financial markets, towards financing conditions or hiring."