The Bank of England has cautioned that stretched valuations for artificial intelligence (AI) companies and challenges to the independence of the Federal Reserve have increased the risk of a sharp market correction. According to its quarterly financial stability update, asset valuations have continued to climb and credit spreads have tightened since its June review, despite ongoing uncertainty surrounding the global macroeconomic outlook. The UK central bank released minutes from the Financial Policy Committee meeting held on October 2, detailing these concerns.
Equity market valuations appear particularly stretched, especially among technology companies focused on AI. The Bank of England noted that these companies are vulnerable to a correction if expectations surrounding the transformative impact of AI become less optimistic. Officials also expressed concerns about potential bottlenecks to AI progress that could negatively impact valuations.
These bottlenecks may arise from limitations in power, data, or commodity supply chains. Conceptual breakthroughs could also change the anticipated infrastructure requirements for AI, further impacting valuations. The Bank of England’s report highlights growing concerns about the sustainability of current valuations in the technology sector, particularly those related to artificial intelligence.
