Global equities, having experienced a sharp rise over the past three years driven by artificial intelligence enthusiasm, are poised for a correction, according to economists and analysts at the European Central Bank (ECB). Their recent blog post states AI’s ascent has pushed technology sector valuations to levels last observed during the dot-com bubble. Historical experience, they warned, suggests technological revolutions carry inherent boom-bust cycle risks in asset prices, irrespective of whether current valuations are deemed rational.
Valuations in the United States are nearing their historical peak, with euro area equity valuations also having risen, albeit to a lesser extent. The ECB analysts highlighted that a sharp market correction would significantly impact the euro area, primarily due to investors’ direct exposure to the “Magnificent Seven” stocks and prevailing exuberance in local markets. They question if today’s prices reflect a rational bet on transformative technology or if markets are replaying the dot-com bubble scenario.
Economic research on past technological revolutions leads to the conclusion that a correction of current stock market valuations is probable. While a rational view suggests high valuations could be justified by extreme uncertainty around new technology’s productivity, like Nvidia’s market cap surge, a behavioural perspective considers overconfident investors bidding prices beyond fundamentals. Both explanations point to a likely pullback, even if AI proves highly successful, and even if valuations climb further before a downturn.
In contrast, Yardeni Research maintains an optimistic view on the S&P 500. The firm recently indicated it might elevate its forecast for the S&P 500 to reach 10,000 by the decade’s end, requiring approximately 7.5 to 8.0 per cent annualised price growth. Yardeni attributes its confidence and recent lift in its 2026 year-end forecast to robust earnings momentum, noting that hitting 8400 by year-end would mark a fourth consecutive year of 15 per cent or more annual gains, a streak last seen in the late 1990s.
