ECB warns of AI stock bubble risk

The European Central Bank (ECB) has raised concerns over a potential bubble in stocks tied to AI, warning that inflated expectations could lead to a sharp market correction. In its latest Financial Stability Review, the ECB highlighted the growing reliance of global markets, particularly in the US, on a small group of tech firms driving the AI boom. This concentration, it cautioned, could trigger widespread instability if these companies fail to meet earnings expectations.

Adding to the risks, the ECB pointed out that investors are accepting low premiums for equities and bonds while many funds are maintaining minimal cash reserves. This leaves markets vulnerable to liquidity shortages, potentially forcing asset sales that could accelerate price declines. Open-ended investment funds, in particular, were flagged for significant liquidity mismatches that could exacerbate any downturn.

The ECB also underscored broader economic challenges, including rising trade fragmentation, a concern amplified by the protectionist policies signaled by US President-elect Donald Trump. Such measures could harm eurozone growth, compounding vulnerabilities as governments like Italy and France face borrowing at much higher interest rates in the coming years. The ECB urged fiscal prudence to manage these pressures effectively.