European Central Bank economists warned on Monday that the strong rise in artificial intelligence stocks is likely to end in a market correction, with a sharp fall in US technology shares posing risks for investors and financial markets across the euro area.
In an ECB blog published on Aug. 17, five economists said US stock valuations are now close to historical highs, while euro-area equities have also risen as investors price in stronger profits and productivity from AI.
The economists said history suggests that major technological shifts can support real economic growth while still pushing asset prices to levels that later prove difficult to sustain.
A correction does not mean AI has failed
The blog compared the current AI cycle with earlier periods of rapid technological change, including railways, electricity, radio and the dot-com era.
According to the economists, high valuations can still be rational when investors are trying to price the uncertain future gains from a new technology.
They pointed to Nvidia as an example, noting that its share price has risen sharply since 2022 as investors bet on the company becoming one of the main winners from AI adoption.
However, the risk changes as AI spreads across more of the economy. What starts as uncertainty around a small group of companies can become a wider economic risk that is harder for investors to diversify.
That can eventually lead investors to demand higher returns and put pressure on share prices, even if profits remain healthy.
The economists also outlined a second possibility in which excessive optimism pushes prices beyond their underlying value, making a later fall more severe.
Euro-area households have €440 billion in US tech exposure
The ECB economists said euro-area households have around €440 billion in exposure to US technology equities, much of it held through mutual funds and exchange-traded funds.
Insurance companies and pension funds also have significant exposure to the Magnificent Seven technology stocks.
A sharp market correction could therefore affect more than individual investors, as funds facing withdrawals may be forced to sell assets and put additional pressure on already falling markets.
The blog also noted that policymakers currently have less room than during the dot-com period to respond with large interest-rate cuts or fiscal support.
Europe faces lower valuations, not lower risk
Euro-area stock valuations remain lower than those in the United States, while European markets are still dominated by more traditional sectors.
The economists said this reduces the risk of a correction starting inside Europe itself. Even so, US and euro-area stock markets have historically moved closely together.
A major decline in US AI shares could therefore affect European equities, confidence, financing conditions and hiring.
The ECB economists said the main point is not that AI will fail, but that even a successful technology can still be followed by a substantial market correction.
