The Bank of England has issued a stark warning about the fragility of the AI-driven market rally, cautioning what will happen when the current wave of intense optimism fades. The Financial Policy Committee (FPC) stated that “stretched” valuations have made markets “particularly exposed” to a “sharp market correction.”
The entire rally is predicated on optimism about the future impact of AI. This has propelled companies like OpenAI to a $500 billion valuation. The FPC’s core argument is that this optimism is a fickle foundation for a global market.
The Bank warns that a shift to a “less optimistic” outlook could be triggered by the growing body of evidence showing a lack of current returns, such as the MIT study where 95% of firms reported no profit from generative AI.
When that optimism fades, the FPC fears a “sudden correction could occur,” leading to a rapid sell-off and a tightening of financial conditions that would harm the real economy.
This financial fragility is amplified by political uncertainty, with the FPC highlighting Donald Trump’s attacks on the US Federal Reserve as another major threat. The FPC stressed that the UK is highly vulnerable to the consequences of fading optimism, with a “material” risk to its financial system.