The IMF and the Bank of England speak out together! Global official institutions issue the clearest warning about the AI bubble

The current artificial intelligence (AI) boom is pushing global stock market valuations to levels similar to those during the 2000 internet bubble, prompting warnings from both the International Monetary Fund (IMF) and the Bank of England (BoE).

IMF President Kristalina Georgieva stated on Wednesday that market optimism regarding AI's potential to enhance productivity could suddenly shift, impacting the global economy. In her remarks ahead of next week's IMF annual meeting, Georgieva pointed out:

Current market valuations are approaching levels we saw during the internet boom 25 years ago. The optimistic expectations surrounding AI have ignited the market and, to some extent, supported the global economy.

However, she also warned that a sharp adjustment in stock prices could drag down global growth, expose vulnerabilities, and put developing countries in a more difficult position.

The AI boom and the weakening dollar have jointly driven a loosening of financial conditions, boosting the global economy. We expect only a slight slowdown in global growth this year and next. Various signs indicate that the global economy has generally withstood the immense pressure from multiple shocks.

Just hours before Georgieva's remarks, the Bank of England's Financial Policy Committee, responsible for overseeing financial stability risks, issued a similar warning, noting that current market sentiment resembles the conditions before the 2000 internet bubble burst, with risks of sudden adjustments in global financial markets. The Bank of England's Financial Policy Committee also stated in the minutes of their meeting:

The risk of a sharp market adjustment has increased.

The committee noted that the cyclically adjusted price-to-earnings ratio of the U.S. stock market is nearing levels seen 25 years ago, equivalent to the peak of the internet bubble.

Multiple indicators show that stock market valuations are high, especially for tech companies focused on AI. Additionally, the increasing concentration within market indices means that if external expectations regarding AI turn pessimistic, the stock market will be particularly vulnerable.

Any price adjustment driven by AI would have a greater impact on investors, as tech companies now account for a record high share of the overall market. The top five tech giants in the S&P 500 now account for nearly 30%, the highest in history.

The Bank of England also mentioned that the risk of a market reversal has been exacerbated by recent defaults in the U.S. auto credit market, which highlight some risks previously flagged by the Bank of England, particularly in market-based financing:

These events once again underscore potential risks such as high leverage, lax review standards, lack of transparency, and complex structures.

Meanwhile, credit market spreads, which measure the interest rate difference between high-risk borrowers and safe borrowers, have fallen to near historical lows.

Recently, the U.S. credit market has been impacted, with subprime auto loan providers Tricolor and auto parts group First Brands defaulting in succession. Both are heavily reliant on loans and accounts receivable financing from private credit providers.

Media analysis suggests that the statements from the IMF and the Bank of England represent the clearest warning from global official institutions regarding the potential bursting of an AI-driven market bubble.

Healthy Bubble

NVIDIA CEO Jensen Huang stated in an interview with CNBC on Wednesday that the current AI boom is fundamentally different from the internet bubble of the past, as today's tech giants, such as Microsoft, Google, and Meta, are far more powerful than the bubble companies of yesteryear, such as the infamous representative of the internet bubble—pets.com.

Federal Reserve officials have also downplayed the risk of a destructive market adjustment. San Francisco Fed President Mary Daly told Axios this week that the AI bubble does not threaten financial stability. "In research and economics, we tend to refer to it as a healthy bubble because it has brought in a lot of investment. Even if investors do not achieve the initially expected returns, this investment is not without merit; it leaves behind productive outcomes."

Market Performance

The current expected price-to-earnings ratio of the S&P 500 index is about 25 times, which is relatively high compared to historical levels but still lower than during the 2000 internet bubble. The index has risen 14% this year, quickly rebounding from the slump following Trump's announcement of the "liberation day" tariff policy in April.

Additionally, some analysts point out that rising political pressure on the Federal Reserve from U.S. politics could lead to a "sharp repricing of dollar assets"; the political deadlock in France and Japan could also disrupt the bond market