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Valuations of US tech stocks such as Nvidia, Alphabet, Microsoft and Meta have become “stretched” as investors are driven by “fears of missing out”, the European Central Bank said on Wednesday.
The warning, in the central bank’s latest Financial Stability Review, follows similar cautions from institutions including the IMF and the Bank of England about high valuations of artificial intelligence stocks.
“Current market pricing does not appear to reflect persistently elevated vulnerabilities and uncertainties,” the ECB said.
Since the temporary sell-off in April over US President Donald Trump’s trade tariffs, markets had been driven by a “renewed risk-on sentiment” that had pushed “already high valuations even higher”, the ECB said in the review. It added that investors were either hoping that “tail risks will not materialise” or were being driven by “fears of missing out on a continued rally”.
Without naming individual stocks, the ECB pointed to “increasing market concentration” amid “persistently high valuations”. This could result in “sharp, correlated price adjustments” if investors were caught out by negative surprises, it said.
However, a market correction would not necessarily mean “the bursting of a bubble”, ECB vice-president Luis de Guindos told journalists, stressing that while there were “doubts about the valuations”, the ECB had not concluded that there was a bubble.
“Markets are discounting a very benign scenario that AI is going to be fully
implemented and adopted all over the world,” said De Guindos,
adding that investors believed that AI business plans would work as
hoped.
“If that scenario does not become real, if there is an accident in the
near future, perhaps the valuations will have an important
correction,” he added.
The review acknowledged that the current tech boom was different to the dotcom bubble in 2000, as today’s companies boasted “high profit margins, strong earnings growth, little debt and diversified underlying businesses beyond AI”.
By contrast, the rally a quarter of a century ago was driven by lossmaking start-ups. However, “opaque private markets” could amplify market falls this time, potentially resulting in “fire sales” and hitting European insurance companies, pension funds and asset managers suffering from “persistent liquidity and leverage vulnerabilities”, the review said.
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The report explicitly mentions “market concern over central bank independence and US debt” as one of the scenarios that could trigger a market correction. Trump has repeatedly lashed out this year against Federal Reserve chair Jay Powell, whose term will end in May, and unsuccessfully tried to oust Fed governor Lisa Cook over allegations of mortgage fraud.
The central bank is also concerned about a potential meltdown of the US Treasuries market over spiralling borrowing under the Trump administration. This could not only “trigger stress in global benchmark bond markets” but also “prompt a broader reassessment of sovereign risk in the euro area”, it said in the review.
In addition, it warned about a potential new European sovereign debt crisis as France struggles to bring its large deficit under control.
Without naming the Eurozone’s second-largest economy, the report pointed to Euro countries “with more fragile political landscapes”, their violations of EU deficit rules and their failure to stick to planned budgets. “Weak fiscal fundamentals in some euro area countries . . . could test investor confidence and trigger stress in bond markets,” the central bank said.
