European Central Bank economists weighed directly into AI-bubble concerns today, saying technology-stock valuations on both sides of the Atlantic have reached levels last seen during the dot-com bubble and warned that a painful correction could be coming.
“The extremely optimistic valuations raise questions: do today’s stock market prices reflect a rational bet on the transformative technology? Or are we seeing a remake of the dot-com bubble? We argue that economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely,” ECB economists and researchers warned in a blog post.
Their metric was Nobel laureate Robert Shiller’s CAPE ratio, which stands for cyclically adjusted price-to-earnings ratio. It is a widely used metric that gauges whether stocks are expensive or cheap relative to companies’ long-term earnings. The economists and researchers say the CAPE ratio is close to its “historical peak.”
While the authors aren’t arguing that AI itself is a mirage, they question whether financial valuations have run ahead of the economic benefits.
The risk is not only for U.S. investors, but also European households. They warn that Euro-area households have increased their indirect exposure to U.S. equities through investment funds, making a major technology correction potentially relevant to household wealth and financial stability.
Meanwhile, “the euro area’s smaller, less richly valued tech sector limits the risk of a home-grown crash. But this offers little reassurance: households, insurers and pension funds have significant exposures through global index trackers, and U.S. equity stress has historically also had an impact on euro area stock markets,” they wrote.
“The effects of a U.S. correction could extend beyond financial markets to euro area sentiment, financing conditions and hiring,” the authors added. “A U.S. AI fallout would not remain a U.S. problem.”