The Bank of England’s Financial Policy Committee (FPC) has delivered a stark message to markets: valuations for artificial intelligence companies appear “stretched,” and the risk of a “sharp market correction has increased.” The committee expressed concern that investors have been swept up in the hype surrounding AI, potentially overlooking fundamental risks and creating the conditions for a sudden downturn.
The report highlights the extraordinary valuations being assigned to AI-focused firms. Companies like OpenAI ($500 billion) and Anthropic ($170 billion) have seen their market worth soar based on future promise rather than current profitability. The FPC warns that this leaves equity markets extremely vulnerable. Should the widespread optimism about AI’s impact diminish, these inflated stock prices could collapse, triggering broader market instability.
Recent academic research supports the Bank’s cautious stance. A study from MIT indicated a severe disconnect between investment and return, showing that 95% of companies investing in generative AI have yet to see any financial benefit. This suggests that the market’s high expectations may be premature. The FPC noted that any material bottlenecks to AI progress, such as power shortages or data supply issues, could also trigger a re-evaluation of these high-flying companies.
Beyond the tech sector, the FPC identified significant political risks. The committee pointed to ongoing commentary from Donald Trump’s administration that threatens the independence of the US Federal Reserve. This political pressure is a source of instability, as the Fed’s credibility is vital for maintaining confidence in US dollar assets, the bedrock of the global financial system.
The potential consequences of these risks crystallizing are severe. A loss of confidence in the Fed could lead to increased volatility and a sharp sell-off in US markets. Given the UK’s position as a global financial centre, the FPC stated that the “risk of spillovers to the UK financial system from such global shocks is material.” Such an event could restrict access to credit for both individuals and corporations across Britain.
