ECB experts called an AI correction likely. JPMorgan flagged autumn downturn risk. The warnings are real and stacking.

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This time is different until it is not. The fear mongering gets old but the signals keep stacking.

  • CCC rated junk bond spreads widened for eight months while S&P 500 hit new highs
  • Similar divergence showed up before the 2022 market peak
  • ECB expert group says AI driven rally makes a stock correction likely
  • Historical parallels include railway boom electricity radio and the 1990s dotcom bubble
  • Euro area households hold over 440 billion euros in Magnificent Seven stocks through funds
  • A US tech drop would hit Europe hard with limited room for rate cuts or fiscal help
  • JPMorgan sees risk of stock downturn this autumn and compares AI stocks to 2000 peak
  • One post calls the coming winter crash a mix of 2000 and 2008
  • Credit markets flash warnings that equity bulls keep ignoring

AI bubble: ECB expert group warns of crash consequences

Several experts from the European Central Bank consider it “likely” that the stock market rally driven by AI stocks will lead to a “correction.” This is suggested by research into similar developments around previous technological revolutions, according to a blog post on the ECB website. A stock market crash would hit the euro area in two ways, the research group warns. Firstly, there are the extensive indirect investments in the stocks of the “Magnificent Seven” – the tech giants Nvidia, Apple, Alphabet, Microsoft, Amazon, Meta, and Tesla – and secondly, “the degree of overexuberance in euro area stock markets themselves.” According to the group, a correction would even be expected if the industry’s valuations were rational.

Timing unpredictable
In the text, the research group points out that there are several historical precedents for the “current excitement surrounding AI.” The most well-known examples they cite are the railway boom in the 19th century, the buzz around electricity and radio in the 1920s, and the dot-com bubble at the end of the 1990s. In all cases, a “genuinely transformative technology” attracted investments, leading to sharp increases in the market values of companies in the sector before they crashed. Economic research offers two complementary explanations for this, but both do not bode well for the current situation. The group, which does not speak for the ECB, considers it important that the forecast of a price correction does not depend on whether current valuations are rational or not.

According to the rational view, high valuations could be justified by the extreme uncertainty regarding the impact of a new technology on productivity. Initially, however, it is a “small-scale experiment.” It becomes problematic when uncertainty spreads to the entire economy. This increases the risk, which is why investors demand a higher risk premium. Therefore, even with rising profits, a stock market crash could follow if profit growth is insufficient to compensate. According to the second explanation, “overconfident, overoptimistic investors bid up prices beyond fundamentals.” In both cases, a correction is therefore likely, although the timing cannot be predicted in advance.

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