European Central Bank researchers are warning that the extraordinary rise in artificial-intelligence stocks is likely to produce a market correction — even if AI ultimately delivers the productivity and profits investors expect.

In a research post published Monday, ECB economists said U.S. technology valuations have climbed to levels last seen around the dot-com era and argued that history suggests the current boom will not move higher indefinitely.

The warning is unusual because it does not depend on AI turning out to be a failure.

The researchers argue that transformative technologies often produce an early surge in valuations because investors place enormous value on the possibility that a small number of companies could dominate the new industry.

That happened with railroads, electricity, radio and the internet.

As the technology matures and spreads throughout the economy, however, the nature of the risk changes.

Investors are no longer betting on a handful of companies succeeding or failing. They become exposed to the technology across the economy, making the risk harder to diversify and increasing the return investors demand for owning stocks.

That can push valuations lower even while corporate profits continue growing.

Investor psychology could make the adjustment more severe.

The ECB researchers said excessive optimism can push prices beyond what fundamentals justify. When that confidence breaks, markets can fall much more sharply than they would under a purely rational repricing.

The concern is particularly important because U.S. technology companies have become a huge part of global investment portfolios.

Euro-area households have approximately €440 billion invested in U.S. technology stocks, much of it through investment funds. European insurers and pension funds also carry substantial exposure to the largest American technology companies.

That means a major decline in Nvidia, Microsoft, Alphabet, Amazon, Meta and other AI-linked stocks would not remain confined to Wall Street.

European markets have historically moved closely with U.S. equities, giving a sharp American technology correction the potential to reduce household wealth, pressure investment funds and tighten financial conditions across Europe.

There is another difference from the dot-com crash.

Governments and central banks today have less room to respond aggressively.

Interest rates are already constrained by persistent inflation, while government debt and deficits limit the ability of many countries to launch massive fiscal rescue programs without increasing borrowing costs.

That could make a future technology selloff more economically damaging than investors expect.

The researchers stopped short of saying AI is a bubble or predicting when a correction will occur.

They also acknowledged that AI stocks could eventually reach valuations substantially above today’s levels if the technology proves transformative enough.

The message is more nuanced — and potentially more important.

AI can change the world.

AI companies can generate enormous profits.

And investors can still lose substantial amounts of money along the way.

JBizNews Desk | Frankfurt

© JBizNews.com All Rights Reserved. Reproduction or distribution without written permission is prohibited.