The European Central Bank has issued a warning about stock markets linked to the enthusiasm for artificial intelligence. According to the ECB, valuations on United States exchanges are close to record highs.

Valuations in the euro area have also risen, although to a more limited extent. Attention focuses mainly on the large American technology stocks, the so-called Magnificent Seven.

These stocks have benefited from investor enthusiasm for artificial intelligence. The ECB notes that such a strong concentration can amplify the effects of any market decline.

A correction risk compared to the dot-com bubble

The ECB points to a recurring pattern observed in past technological revolutions. A phase of strong growth in investment and valuations is often followed by a sharp correction.

The phenomenon was already seen with railways and with electricity. In the 1990s the same pattern involved the Internet and the dot-com bubble.

The comparison with the dot-com era helps to frame the present. The ECB research stresses that enthusiasm for a promising technology does not guarantee that market valuations are sustainable over time.

The exposure of European households and investors

According to the data cited by the ECB, euro area households hold around 440 billion euros of American technology stocks. Much of this exposure comes through funds and ETFs.

Insurance companies and pension funds also show significant exposure to the same segment. This directly links the performance of United States markets to European savings.

A fall in the markets could trigger redemptions and forced selling. In this scenario the initial decline risks being amplified and turning into a financial stability problem.

Less room for intervention than in the past

The ECB highlights an important difference compared with the dot-com bubble. The current starting point leaves authorities with less room to manoeuvre.

The lever of interest rates and that of fiscal policy appear more limited today. This reduces the capacity to cushion the consequences of a possible market crisis.

The warning is not a forecast of a crash, but a call for caution. The ECB signals that a correction linked to artificial intelligence could have broader effects than the technology sector alone would suggest.

The overall message concerns risk management. Investors and institutions are called to assess carefully their exposure to a segment driven by very high expectations.

Source: primaonline ilsole24ore

Original article: hdblog