"AI boom poses risk of 'sudden stock market correction'"…Warnings from IMF and BOE

IMF Managing Director "Optimism about AI could suddenly reverse"

BOE "Price-to-earnings ratios approaching dot-com peak"

The global financial authorities, the International Monetary Fund (IMF) and the Bank of England (BOE), warned that the artificial intelligence (AI) frenzy is pushing global stock markets to levels seen during the dot-com bubble and that a 'sudden correction' is possible.

IMF Managing Director Kristalina Georgieva said on the 8th (local time) at the Milken Institute in Washington D.C. that "market optimism about AI's productivity-enhancing potential could suddenly reverse, which could shock the global economy." She also said, "current stock market valuations are approaching levels seen during the internet boom 25 years ago."

Georgieva acknowledged that "optimism about AI has heated the market and has contributed to supporting the global economy to some extent," but warned that "if stock prices were to adjust sharply, global growth would slow, financial market vulnerabilities would be exposed, and developing countries in particular would suffer much more as a result."

The Bank of England's Financial Policy Committee (FPC) also noted in minutes published the same day that the current AI boom has a market structure similar to that during the 2000 dot-com collapse and warned that "a sudden correction could occur in global financial markets."

The BOE analyzed that the cyclically adjusted price-to-earnings ratio of U.S. stocks is approaching dot-com bubble peak levels, describing it as "similar to the peak of the dot-com bubble 25 years ago." It added that "the S&P 500's one-year forward price-to-earnings ratio (PER) is 25 times, which is high compared with the historical average and somewhat lower than during the 2000 dot-com bubble."

However, there was no shortage of rebuttals. Jensen Huang, CEO of Nvidia, said in a CNBC interview that "this AI boom is fundamentally different from the dot-com bubble." He argued that "current hyperscaler companies are financially much healthier and far more capitalized than dot-com era startups like 'Pets.com'." A hyperscaler company refers to firms such as Microsoft, Google, and Meta that have the ability to build their own data center, computing, storage, and network infrastructure. Pets.com was an iconic company of the dot-com bubble; its stock fell below $1 nine months after listing.

Meanwhile, U.S. Federal Reserve officials also view the possibility of an AI bubble as low. Mary Daly, president of the San Francisco Fed, recently said, "The AI bubble is not a threat to financial stability" and that "economically it is closer to a 'good bubble.'" She explained that "the AI investment boom is channeling large amounts of money into technological innovation, and even if early investors do not obtain all the expected returns, if that investment remains a productive asset, it is beneficial to society as a whole."

New York=Park Shin-young, correspondent nyusos@hankyung.com