AI bubble heading for ‘market correction’ warns Bank of England

Bursting of the AI bubble could cause a shock to the global financial system

The so-called AI bubble is at risk of turning into a bust, with wider implications for the global economy similar to the bursting of the dot-com bubble in April 2000.

That’s according to the Bank of England’s Financial Policy Committee (FPC) in its latest update on the state of the global financial system. It warned that such a bust would almost certainly have a “spillover” into the UK.

“On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on Artificial Intelligence (AI). This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic,” warned the report, conveying the record of the FPC’s meeting last week.

It comes as US stock valuations reach near all-time highs, despite the choppy economic environment generated by President Trump’s aggressive tariff-led trade wars.

These, though, haven’t greatly affected US technology companies, which have posted strong financial results this year, while investors have piled into the biggest and safest companies on US markets.

“The price appreciation of the largest technology firms this year had increased the concentration within US equity indices to record levels. The market share of the top five members of the S&P 500, at close to 30%, was higher than at any point in the past 50 years,” notes the report.

Moreover, the rising gold price – now up to more than $4,000 per ounce for the first time – is also seen as a harbinger of economic troubles.

The warning of a spillover into the UK comes despite the lack of AI-focused companies trading on the London Stock Exchange (LSE).

Indeed, the number of new listings on the LSE has crashed in recent years, with only £160 million raised from five IPOs in the first half of 2025 – a lower figure than Mexico. Moreover, there has also been a concomitant exodus of companies to the US, with 88 companies delisted or transferring their primary list in 2024.

The Bank of England’s economic warning comes at the same time as increases in Japanese interest rates raises concerns that the so-called yen carry trade is about to unwind, hitting investment and asset values across the world.

The trade has been running since the mid-1990s when the Bank of Japan adopted a policy of ultra-low interest rates in a bid to prevent deflation and to encourage the country’s ageing population to spend more and save less.

Instead, however, hedge funds and other investors took advantage of the relatively low interest rates in Japan to borrow in yen, convert to dollars, pounds, euros or other countries’ currencies, and invest in assets across the US, Europe and elsewhere where returns would be almost guaranteed to be higher than the rates they were borrowing in yen – boosting asset values in those countries.

But with interest rates in Japan finally normalising, that trade will, at best, dry up, but could potentially lead to a large-scale unwinding of positions.