Bank of England warns AI borrowing boom heightens market risks

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Bank of England AI risk warning

Highlights

Bank of England warns that excesses in the AI trade could trigger a sharp stock market correction, reducing UK output by 2.2 percentage points.
U.S. equities valuations are stretched, with S&P 500's excess CAPE yield near dotcom-era lows and retail inflows rising into leveraged ETFs, increasing risk of volatility.
Hyperscalers' 2024 investment-grade debt issuance now exceeds last year's total and may surpass U.S. banks as the largest sector by year-end, matching UK gilt issuance scale.

Financial stability concerns from AI funding

As reported by Financial Times, the Bank of England’s latest financial stability report says stock market valuations look stretched for a third consecutive edition, with policymakers focusing on the risk that excesses in the AI trade could trigger wider financial stress.

The central bank says a significant fall in stock prices would hit individual investors and could prompt a broader retreat from risky assets, making it harder for companies to finance themselves. It adds that a large correction linked to U.S. AI stocks could reduce UK output by 2.2 percentage points.

The report points to valuation measures that show U.S. equities becoming more expensive relative to safer assets, with the S&P 500’s excess CAPE yield nearing its lowest level since the dotcom era. It also highlights growing retail inflows into leveraged exchange traded funds, warning that leverage can intensify price swings during periods of thin market liquidity.

Hyperscaler bond issuance expands rapidly

The Bank of England also identifies corporate funding trends as a second major source of concern, arguing that hyperscalers’ free cash flow is being eroded by heavy data centre capital expenditure tied to the AI build-out.

After initially funding infrastructure spending from internal cash generation, large technology groups are now raising increasing sums in bond markets across major currencies. The report says investment-grade debt issuance by hyperscalers this year already exceeds the full-year total from last year and is on track to overtake U.S. banks as the largest sector in U.S. dollar investment-grade debt by share of outstanding debt by the end of this year.

Across all currencies, the Bank of England says year-to-date investment-grade issuance by hyperscalers is broadly comparable in scale to UK gilt issuance over the same period. It also flags other financing structures, including off-balance-sheet special purpose vehicles, circular financing arrangements and greater use of private markets, as areas that could remain opaque until market stress exposes vulnerabilities.

Our earlier coverage of the pullback in AI-linked chip stocks described how mounting valuation concerns and new competitive risks triggered a broad retreat across semiconductors, weighing on the Nasdaq despite strong earnings from Samsung Electronics. We also noted that investor positioning around South Korea—including SK Hynix’s U.S. Nasdaq debut—was shaping near-term sentiment as markets reassessed how much AI-driven gains can be sustained.

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