The Bank of England has elevated its warning level on the health of global markets, stating that the “risk of a sharp market correction has increased.” In its latest assessment, the Financial Policy Committee (FPC) identified overheated valuations in the AI technology sector and political threats to the US Federal Reserve’s independence as primary sources of instability.
The committee expressed significant concern over the “stretched” valuations of technology companies focused on artificial intelligence. A wave of optimism has sent the value of firms like OpenAI and Anthropic to unprecedented heights, now at $500 billion and $170 billion respectively. The Bank cautioned that this leaves equity markets highly exposed to a sudden downturn should the hype around AI begin to dissipate.
Evidence suggests that the current enthusiasm may not be justified by performance. Research from the Massachusetts Institute of Technology recently showed that 95% of organizations are getting zero return from their investments in generative AI. The FPC warned that if this reality prompts investors to reconsider the high expected future earnings of AI firms, stock market valuations could tumble dramatically.
Alongside the tech bubble risk, the FPC is closely watching the political situation in the United States. Donald Trump’s ongoing criticism of the Federal Reserve and threats to its independence are viewed as a serious risk to financial stability. The committee noted that a loss of Fed credibility could have severe consequences for global markets.
Specifically, it could trigger a “sharp repricing of US dollar assets,” including US sovereign debt. This would likely cause a spike in market volatility and risk premia across the board. The FPC emphasized that as an open economy, the UK is particularly vulnerable to such “global spillovers,” which could disrupt the flow of financing to British households and corporations.