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.
