Drawing parallels to previous market bubbles, the Bank of England has raised serious concerns that the current frenzy around artificial intelligence could end in a “sudden correction.” The bank’s financial policy committee stated that the risk of such an event has grown, fueled by “stretched” valuations in the tech sector that are reminiscent of the dot-com era.
The committee pointed to the meteoric rise of companies like OpenAI, now valued at $500 billion, and Anthropic, which has seen its value nearly triple to $170 billion in just a few months. This explosive growth is based on high expectations for future earnings from AI. However, the Bank warns that these markets are fragile and exposed to a downturn if the hype around AI’s transformative power begins to fade or fails to translate into tangible profits.
Adding weight to these fears is a sobering study from the Massachusetts Institute of Technology. The research found that 95% of organizations are currently getting zero financial return from their generative AI projects. This suggests a significant gap between market perception and on-the-ground reality. The Bank of England warned that if this reality check hits investors, it could trigger a massive re-evaluation of stock prices, leading to a sharp market fall.
Further complicating the outlook is political instability in the United States. The FPC voiced its concern over Donald Trump’s continued threats against the independence of the US Federal Reserve. The credibility of the Fed is a cornerstone of the global financial system, and any perceived erosion of its independence could have far-reaching consequences.
A loss of faith in the Fed could result in a “sharp repricing of US dollar assets,” which would send shockwaves across the globe. For the UK, which has a deeply integrated financial system, the spillover effects could be severe. A dual shock from a bursting AI bubble and a US financial crisis could cut off crucial funding for British businesses and households, posing a significant risk to the nation’s economic health.