Global stock markets could tumble if President Trump continues to interfere with the Federal Reserve or investors start to turn away from AI.
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Dotcom Memories
The Bank of England warned in its latest financial stability assessment that share price valuations on U.S. stock markets reminded it of the peak of the dotcom bubble in the early 2000s.
“The risk of a sharp market correction has increased,” the BoE’s Financial Policy Committee said in a quarterly update, in its sharpest warning to date of the dangers of an AI-triggered market slump.
The Bank of England said that 30% of the U.S. S&P 500’s valuation was made up by the five largest companies, the greatest concentration in 50 years.
This includes Nvidia (NVDA) with a market value of $4.5 trillion and Microsoft (MSFT) with $3.9 trillion.
It said share valuations based on past earnings were the most stretched since the dotcom bubble 25 years ago, though looked less so based on investors’ expectations for future profits.
“This, when combined with increasing concentration within market indices, leaves markets particularly exposed should expectations around the impact of AI become less optimistic,” the BoE said.
Despite these concerns, AI stock prices have raced higher this year – see above.
Staying Free
On the issue of Federal Reserve independence, the Bank said that President Donald Trump has also repeatedly urged the U.S. central bank to slash interest rates and has sought to remove one of its policymakers Lisa Cook.
“A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of U.S. dollar assets, including in U.S. sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers,” the BoE said.
In a note today investment bank Goldman Sachs (GS) agreed that equity markets are showing signs that “rhyme with previous bubbles” but argued that the current rally, particularly in technology stocks, “has, so far, been driven by fundamental growth rather than irrational speculation.”
“There are elements of investor behaviour and market pricing currently that rhyme with previous bubbles, including the rise in absolute valuations, high market concentration, increased capital intensity of leading companies and the emergence of vendor financing,” Goldman said. “However, the leading companies that have seen the strongest returns have unusually strong balance sheets.”
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