U.S. and European stocks are scaling record highs as investors pour money into artificial intelligence, but economists at the European Central Bank are warning that the current rally could eventually give way to a sharp market correction, even if AI delivers the productivity gains investors expect.
In a blog published Monday, ECB economists said historical episodes of technological transformation suggest that periods of rapid innovation and rising equity valuations are often followed by substantial pullbacks.
“Economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely,” the economists wrote.
They outlined two possible paths to such a correction. In the first, investors become overly optimistic about the commercial potential of AI, pushing share prices above companies’ underlying earnings prospects. Once expectations begin to weaken, the resulting reversal could produce a sharp selloff.
The second scenario is more significant because it does not depend on an outright AI failure. Even if current valuations accurately anticipate substantial improvements in productivity and corporate profits, the economists note that stock prices could still fall as investors gain a clearer understanding of the risks surrounding the technology.
The ECB drew comparisons with earlier technological investment booms, including the 19th-century expansion of railways, the spread of electricity and radio in the 1920s and the internet boom of the 1990s. In each episode, the adoption of a transformative technology eventually became sufficiently widespread that concerns about its economic prospects extended beyond individual companies and sectors.
“As adoption spreads…uncertainty becomes economy-wide. If something then goes wrong with that technology, the whole economy suffers,” the economists wrote.
That broadening of risk can change how investors value equities. As uncertainty rises, investors may demand a higher risk premium, effectively reducing the price they are willing to pay for future corporate earnings. The ECB economists said their analysis indicates that this process can push equity valuations lower even when companies continue to generate strong profit growth.
“Both views imply a boom followed by a correction, or a pullback from wherever valuations have risen, at some point in the future,” they wrote.
The economists stressed that the analysis does not amount to a forecast of an imminent crash. The timing of market turning points cannot be reliably established in advance, and technological booms can continue for years before valuations reverse.
“The exact timing is unknowable in advance. These boom-bust patterns are only identifiable with hindsight,” they said.
The warning comes as AI has become increasingly important to global equity markets. A relatively small group of technology companies has driven a substantial portion of the gains in major U.S. indexes, while semiconductor manufacturers, cloud providers and other companies supplying AI infrastructure have attracted enormous investor interest.
The concentration creates another potential vulnerability for European investors. The ECB economists said retail investors may have greater exposure to AI-related valuations than they realize because the so-called Magnificent Seven U.S. technology stocks feature prominently in global index funds and pension portfolios.
A major decline in those companies could therefore spread well beyond investors who directly hold individual AI or semiconductor stocks.
The ECB also warned that a severe market correction could generate broader financial risks through investment funds and other fund-based structures, potentially creating spillover effects for the euro area financial system.
The policy environment could make such a shock harder to absorb than previous market downturns. The economists noted that, compared with the dot-com era, central banks have less room to reduce interest rates and governments may have less fiscal capacity to respond if a major correction hits economic activity.
The ECB’s warning therefore goes beyond the question of whether AI is overvalued. Its central concern is that even a technology capable of delivering substantial economic gains can generate financial instability if investment expectations become too concentrated, valuations rise too far, and the technology becomes deeply embedded across the economy.
A correction, the economists said, would not necessarily mark the end of the AI investment cycle. Historically, technological booms have often been followed by periods of repricing before investment and adoption resume at more sustainable levels.
