'Worrisome': AI is driving a looming market correction, central bank economists warn

U.S. and European stocks are reaching record highs as investors pursue the artificial-intelligence boom, but economists at the European Central Bank warn that history points toward a correction. In a Monday blog, they outlined two possible paths. Overconfident investors may push prices above fundamental value, creating a crash when enthusiasm fades. Alternatively, valuations may accurately reflect AI’s ability to reshape the economy and increase corporate profits, yet still decline as investors demand progressively higher risk premia. The economists compared the current cycle with the 19th-century railway boom, electricity’s expansion, radio in the 1920s and the internet’s rise in the 1990s. As adoption spreads, uncertainty becomes economy-wide. If a critical technology then fails, the wider economy can suffer, increasing the return investors require to hold risk assets. Both scenarios imply a boom followed by a correction or pullback, potentially followed by a recovery and another advance. The timing cannot be known in advance, and boom-bust patterns are generally identifiable only in hindsight. The analysis also suggests that a correction could occur even if profit growth remains robust. European retail investors may be particularly vulnerable because of the prevalence of Magnificent 7 stocks in global index funds and pension funds. The ECB economists warned that a sharp decline could create knock-on effects through fund-based structures and threaten euro area stability. They also noted that policymakers have less room than during the dot-com episode to respond, with less scope to cut interest rates or use fiscal policy to cushion the fallout. The warning comes as market participants debate whether AI valuations already constitute a bubble. Mark Okada of Sycamore Tree linked hyperscalers, AI infrastructure spending and Treasury yields, while Mitchell Green of Lead Edge Capital said the market is in an AI bubble. For investors, the ECB’s message is not that AI’s economic promise is false. It is that successful technological transformation can still produce unstable valuations, rising risk premiums and significant portfolio losses.