AI Investment Bubble Warning: Financial Institutions Raise Concerns About Market Correction Risks

The Bank of England recently warned that the risk of a sharp market correction has intensified.

London:

Growing skepticism about artificial intelligence's economic potential is now catching the attention of major financial institutions, which this week issued warnings about a potential AI investment bubble.

The Bank of England on Wednesday highlighted escalating concerns that tech stock prices inflated by AI enthusiasm could collapse.

"The risk of a sharp market correction has increased," stated the UK central bank.

Shortly after this report, the International Monetary Fund's leadership expressed similar concerns.

Global stock values have been climbing rapidly, driven by "optimism about the productivity-enhancing potential of AI," according to IMF Managing Director Kristalina Georgieva.

However, she cautioned in a pre-annual meeting speech that financial conditions could "turn abruptly."

"Bubbles obviously are never very easy to identify, but we can see there are a few potential symptoms of a bubble in the current situation," explained Adam Slater, lead economist at Oxford Economics.

These warning signs include rapid tech stock price growth, tech stocks now representing approximately 40% of the S&P 500, market valuations that appear "stretched" beyond their actual worth, and "a general sense of extreme optimism in terms of the underlying technology, despite the enormous uncertainties around what this technology might ultimately yield," according to Slater.

The most optimistic forecasts about generative AI suggest an economic transformation, potentially leading to annual productivity gains unseen since Europe's post-World War II reconstruction. At the lower end of predictions, MIT economist Daron Acemoglu has projected a "nontrivial but modest" US productivity increase of merely 0.7% over a decade.

"You've got this incredibly wide range of possibilities," Slater noted. "Nobody really knows where it's going to land."

Investors have been closely monitoring the series of interconnected deals between leading AI developers like OpenAI, creator of ChatGPT, and companies manufacturing the expensive computer chips and data centers essential for powering these AI systems.

Although OpenAI isn't profitable, the privately held San Francisco company is now valued as the world's most valuable startup at $500 billion. It recently formed major partnerships with chipmaker Nvidia, currently the world's most valuable publicly traded company, its competitor AMD, and a $300 billion agreement with Oracle for future data center development.

While not naming specific companies, the Bank of England stated that on "a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence."

The report indicated that current stock market valuations are "comparable to the peak" of the 2000 dotcom bubble, which subsequently collapsed and triggered a recession. With tech stocks comprising an increasingly significant portion of benchmark stock indexes, markets are "particularly exposed should expectations around the impact of AI become less optimistic."

The bank outlined potential downside risks, including shortages of electricity, data, or chips that might impede AI advancement, or technological shifts that could reduce demand for the type of AI infrastructure currently being constructed worldwide.

The IMF's Georgieva observed that current stock valuations "are heading toward levels we saw during the bullishness about the internet 25 years ago. If a sharp correction were to occur, tighter financial conditions could drag down world growth."

Tech industry leaders are minimizing these warnings.

Amazon founder Jeff Bezos characterized the current AI boom as an industrial rather than financial or banking bubble, suggesting it will benefit society even if it bursts.

"The ones that are industrial are not nearly as bad. It could even be good because when the dust settles and you see who are the winners, society benefits from those inventions," Bezos remarked at a recent technology conference in Italy.

He drew parallels to the 1990s biotech bubble that ultimately resulted in new life-saving medications.

While AI enthusiasm is attracting massive investment for new business concepts, it's also clouding investor judgment, according to Bezos.

"Every company gets funded, the good ideas and the bad ideas. And investors have a hard time in the middle of this excitement distinguishing between the good and bad ideas and so that's also probably happening today," he explained.

During a recent Texas data center tour, OpenAI CEO Sam Altman predicted people will "make some dumb capital allocations" with short-term fluctuations of overinvestment and underinvestment.

However, he added that "over the arc that we have to plan over, we are confident that this technology will drive a new wave of unprecedented economic growth," along with scientific breakthroughs, quality of life improvements, and "new ways to express creativity."

In a Wednesday CNBC interview, Nvidia CEO Jensen Huang acknowledged that OpenAI currently lacks funds to purchase its chips but "they're going to have to raise that money" through revenue, which "is growing exponentially," complemented by equity or debt.

Huang also suggested a transition has occurred as leading AI developers move from operating chatbots "basically at a loss" because the models "weren't useful enough to pay for" to systems capable of higher-level reasoning.

"It's doing research before it answers a question," he explained. "It goes on the web and studies other PDFs and websites, it can now use tools, generate information for you, and it creates responses that are really useful."

AI companies have spent over a year promoting the transformative potential of "AI agents" that exceed chatbot capabilities by accessing a user's computer to handle coding and other work tasks. However, as initial excitement fades, Forrester analyst Sudha Maheshwari noted businesses purchasing these AI tools are more carefully evaluating their return on investment.

"Every bubble inevitably bursts, and in 2026, AI will lose its sheen, trading its tiara for a hard hat," she wrote in a Wednesday report.

(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)