ECB Warns of Market Vulnerability Amid AI-Driven Valuations

European Central Bank Vice President Boris Vujčić has sounded the alarm on AI-driven asset rallies, warning that valuations are 'very high' and equity markets are vulnerable to corrections.

Speaking on the ECB's podcast 'Euro Matters', Vujčić noted that price-to-earnings ratios and forward P/E ratios have not been seen in a long time. He warned of substantial exposures and growing capital inflows, which pose risks to equity market repricing.

Vujčić's comments echo those of ECB President Christine Lagarde, who also stated that asset valuations in the AI sector are 'very high' and a pullback is 'entirely possible', although she did not predict when it might occur. The warnings come as AI developers clash with the US administration over their call to slow down AI development.

The valuation of leading AI companies may be overblown, and a sudden drop in these valuations could trigger a broader global market correction, according to a growing consensus among central bank governors, regulators, and investors. The Central Bank has elevated this issue to the core of its 'financial stability' agenda, citing geopolitical risks and fiscal policy as major concerns.