The European Central Bank (ECB) has sounded the alarm over an artificial intelligence (AI) bubble as it warned of ‘stretched’ valuations in financial markets.
It said ‘fear of missing out’ – or ‘fomo’ – could be behind the extended rally heavily concentrated on the ‘Magnificent Seven’ US tech stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
The alert follows a warning by the Bank of England drawing parallels with the dotcom bubble 25 years ago.
It came as chip maker Nvidia – now the world’s most valuable company – rejected the idea that it was facing an Enron-like financial scandal.
US tech stocks have soared amid investor frenzy over the potential for AI to transform business and society.
But some critics have started to raise fears that their valuations have raced too far ahead, creating a bubble that, should it burst, could have devastating financial consequences.
AI fears: The European Central Bank said ‘fear of missing out’ – or ‘fomo’ – could be behind the extended rally heavily concentrated in the ‘Magnificent Seven’ US tech stocks
In the ECB’s latest financial stability review, it said: ‘Stretched valuations in increasingly concentrated asset markets raise risk of sharp price adjustments.’
It said there was an ‘apparent disconnect’ between buoyant markets and worrying global issues such as US tariffs and soaring government debt.
‘Current market pricing does not appear to reflect persistently elevated vulnerabilities and uncertainties.
‘Alternatively, it may reflect fears of missing out on a rally, as markets have proved to be resilient to recent shocks, or it could be related to an increasingly complex, and hard-to-price risk environment.’
Valuations are increasingly concentrated among just a few tech stocks, with the top per cent of companies in New York’s S&P 500 index accounting for 30 per cent of its valuation.
However, the ECB said: ‘Parallels with the early 2000s are fuelling concerns that an asset price bubble may be building, but the current high valuations appear to be underpinned by exceptionally robust earnings performance.’
It comes after concerns about AI and prospects for US interest rate cuts recently prompted big swings in global markets.
This week Nvidia shares fell sharply amid fears that it could be losing its lead in the AI race.
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