ECB warns of ‘bubble’ in AI stocks as funds deplete cash buffers

Frankfurt — The European Central Bank (ECB) warned on Wednesday about a “bubble” in stocks related to artificial intelligence (AI), which could burst abruptly if investors’ rosy expectations are not met.

The warning was contained in the ECB’s biannual Financial Stability Review, which listed risks ranging from wars and tariffs to cracks in the plumbing of the banking system.

The central bank for the 20 countries that use the euro noted that stock markets, particularly in the US, had become increasingly dependent on a handful of companies perceived as the beneficiaries of the AI boom.

“This concentration among a few large firms raises concerns over the possibility of an AI-related asset price bubble,” it said. “Also, in a context of deeply integrated global equity markets, it points to the risk of adverse global spillovers, should earnings expectations for these firms be disappointed.”

The ECB noted investors were demanding a low premium to own shares and bonds while funds had cut their cash buffers.

“Given relatively low liquid asset holdings and significant liquidity mismatches in some types of open-ended investment funds, cash shortages could result in forced asset sales that could amplify downward asset price adjustments,” it said.

Among other risks, the central bank flagged that the eurozone was vulnerable to more trade fragmentation — a huge source of concern for policymakers and investors since Donald Trump won the US presidential election earlier in November.

Trump made tariffs a central element of his pitch to voters during the campaign and several ECB policymakers have said these measures, if implemented, would hurt growth in the eurozone.

The ECB also noted eurozone governments — Italy and France, in particular — would be borrowing at much higher interest rates over the coming decade, strengthening the need for prudent fiscal policies.

Reuters