UK investors should brace for a potential sharp correction in the value of UK stocks, driven by inflated valuations for AI companies, according to the Bank of England.
The central bank’s Financial Policy Committee recently reported that stock valuations appear stretched, particularly for technology firms focused on AI. This situation could leave equity markets vulnerable if expectations surrounding AI’s impact shift to a less optimistic outlook.
While the report did not specify any companies, it drew parallels with the dot-com bubble of the early 2000s, which saw significant declines in the stock prices of various online and e-commerce firms, including some fintechs.
AI companies have gained prominence in the financial services sector recently. For instance, generative AI developer OpenAI’s acquisition of the personal finance app Roi indicates that AI may further penetrate the financial advisory market. Additionally, some of the largest AI-related firms have experienced substantial increases in their valuations in recent months.
The report also pointed out several other factors contributing to global economic uncertainty, including geopolitical tensions, the fragmentation of global trade, and pressures on sovereign bond markets.
The Bank of England cautioned that “uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes,” suggesting a sudden correction could occur if these risks materialize. A sharp correction could interact with vulnerabilities in market-based finance, potentially affecting the cost and availability of finance for households and businesses.