However, Bailey ruled out any new regulations or policies to mitigate the financial stability risks from high valuations in the sector, instead arguing the Bank needed a greater understanding of the consequences for financial stability.
Hedge funds have piled into semiconductors and other AI-related stocks in recent months, while AI companies now make up half of the U.S. S&P 500, up from a quarter in 2022, along with rapid growth in stock markets in Taiwan and South Korea.
In addition, retail investors increasingly placing their cash in the stock market “may have added momentum to the rise in equity prices,” the Bank said, with Bailey adding that he was particularly concerned about the rapid increase in popularity of leveraged exchange-traded funds among savers.
“While UK equity indices continue to be considerably less exposed to AI companies directly, a correction in the valuation of these companies could nevertheless have a significant effect on global equity markets more generally,” said the financial stability report. “This would affect the UK macroeconomy and financial system via spillovers.”
Under the Bank’s modeling, equity market effects would account for about 36 percent of the hit to the economy, while turbulence in the bond market would account for around half.
Meanwhile, the report warned that “self-reinforcing capital loops,” where tech companies invest in AI companies that spend the money on products from the same tech companies, “increase the likelihood that a negative shock could result in a large and correlated negative earnings re-evaluation across a wider set of AI-related businesses.”