The European Central Bank (ECB) has cautioned about the growing risk of an asset price bubble in AI-related stocks. In its biannual Financial Stability Review, the bank pointed to the potential for significant disruptions if market expectations for these firms are not met.
The ECB noted that stock markets, particularly in the US, have become increasingly reliant on a small group of technology companies seen as beneficiaries of the AI boom. This trend, according to the central bank, raises concerns about market concentration and the potential for widespread impacts.
“This concentration among a few large firms raises concerns over the possibility of an AI-related asset price bubble,” the ECB stated. It added that the interconnected nature of global equity markets could exacerbate the impact of a market correction. “It points to the risk of adverse global spillovers, should earnings expectations for these firms be disappointed,” the review stated.
The ECB also flagged declining liquidity buffers within investment funds as a point of vulnerability. Funds have reduced their cash reserves while maintaining significant exposure to less liquid assets, which the central bank warns could amplify market downturns in the event of a shock. “Given relatively low liquid asset holdings and significant liquidity mismatches in some types of open-ended investment funds,” the report noted, “cash shortages could result in forced asset sales that could amplify downward asset price adjustments.”
Goldman Sachs offers a different outlook on AI stock valuations
Goldman Sachs Research, in a separate report from September, presented a contrasting perspective. Analysts from the investment bank argued that US technology stocks, despite their substantial gains in 2024, are not in a bubble and that these companies’ earnings growth and profitability justify their valuations.
Peter Oppenheimer, chief global equity strategist at Goldman Sachs, observed that the success of dominant technology firms has been underpinned by advancements in software and cloud computing as well as sustained demand. However, he noted that the high concentration of market value in a few firms creates risks, including vulnerability to stock-specific disruptions and regulatory challenges.
Oppenheimer pointed to historical patterns in transformative technologies, stating that while many attract substantial investment and competition, they do not always result in market bubbles. He noted that AI’s reliance on significant capital investment could limit profitability for some firms over time. Rising competition, he suggested, may also give rise to a new wave of market leaders.
Goldman Sachs emphasised diversification as a strategy to manage risks tied to market concentration. The firm recommended that investors look beyond the largest technology companies, identifying smaller technology firms, healthcare, financial services, and traditional sectors adopting AI as areas of opportunity.
Capital Economics forecasts AI stock bubble by 2026
Meanwhile, research firm Capital Economics, in a report in April 2024, projected that the current AI-driven stock market rally will culminate in a bubble, expected to burst by 2026. According to the firm, investor enthusiasm for AI could push the S&P 500 index to as high as 6,500 by 2025, largely fuelled by gains in technology stocks.
However, Capital Economics warned that these gains are likely to reverse sharply starting in 2026. The firm cited the impact of higher interest rates and persistent inflation as key factors that could weigh on equity valuations.
In its analysis, Capital Economics noted that while AI-related optimism has driven the strong rally in equities over the past year, stock markets now appear significantly overvalued. “Although we think they can continue to power ahead over the near term as a stock market bubble inflates further, we doubt this will be sustained and expect the bubble to burst beyond the end of 2025,” the report stated.
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