ECB Experts Warn of €440 Billion Risk from AI-Driven Stock Market Correction

A team of economists at the European Central Bank (ECB) has warned that a correction in AI-driven stock markets could have severe consequences for the euro area. The analysis, published on the ECB Blog, points out that valuations in the US market are at levels similar to those seen during the dot-com bubble.

The cyclically adjusted price-to-earnings ratio (CAPE ratio) of the S&P 500 is near its historical high, while valuations have also risen in the euro area, albeit to a lesser extent. The authors attribute this trend to the option value of new technologies, which can drive up prices but may eventually lead to a correction.

The ECB estimates that euro-area households' exposure to US technology stocks is around €440 billion, mainly through investment funds and ETFs rather than directly held shares. This fund structure poses a transmission channel for potential market instability, as funds must sell assets to meet redemptions in the event of a sharp correction.

The authors conclude that an AI-related setback in the United States would not remain a purely American problem, with potential effects extending beyond financial markets and affecting sentiment, financing conditions, and hiring behaviour in the euro area.