Global financial markets could face a sharp correction if investor confidence falters in AI or in the independence of the U.S. Federal Reserve (Fed), according to a stark warning from the BoE.
In its latest quarterly update, the BoE’s Financial Policy Committee (FPC) cautioned that market valuations—particularly in U.S. equities—are beginning to resemble those seen during the dotcom bubble of the early 2000s, claims Reuters.
The central bank said that share prices, especially in AI-related sectors, are “stretched” on some measures, reflecting soaring optimism over the long-term growth potential of technology giants such as Nvidia, Microsoft, Apple, Alphabet, Amazon, and Meta.
The FPC, chaired by BoE governor Andrew Bailey, said: “The risk of a sharp market correction has increased.” It warned that any significant cooling of investor sentiment towards AI could lead to a rapid downturn in global markets. The committee added that such a correction could have “material” spillover effects on the UK financial system, given the deep interconnection between U.S. and British markets.
Bailey has previously voiced concern over political pressure on the U.S. central bank, telling UK parliament last month that he was “very concerned” about threats to the Fed’s independence. The BoE reiterated that a perceived loss of credibility at the Fed could destabilise global financial conditions.
“A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of U.S. dollar assets, including in U.S. sovereign debt markets, with the potential for increased volatility, risk premia and global spillovers,” the BoE said.
The warning comes amid renewed fears that political interference could undermine the Fed’s policy decisions. Former U.S. President Donald Trump has repeatedly called for aggressive rate cuts and even attempted to remove one of the Fed’s policymakers, Lisa Cook. The BoE cautioned that such political moves could erode trust in the central bank’s independence, pushing up global borrowing costs.
Britain, whose debt yields tend to track U.S. Treasury movements, could see higher borrowing costs if U.S. bonds decline. Thirty-year gilt yields recently reached their highest level since 1998, with shorter-term rates also climbing as investors reassessed the sustainability of high government borrowing across advanced economies.
On the AI front, the BoE noted that around 30% of the total value of the S&P 500 now comes from the five largest tech firms—a level of market concentration unseen in half a century. “This, when combined with increasing concentration within market indices, leaves markets particularly exposed should expectations around the impact of AI become less optimistic,” the BoE said.
Recent investor enthusiasm has been fuelled by companies betting heavily on AI, with Nvidia leading the semiconductor race and major firms such as Microsoft and Meta expanding their AI infrastructure. Meta CEO Mark Zuckerberg recently said he would “rather misspend a couple of hundred billion dollars than risk being late to the AI expansion.”
However, analysts warn that the optimism driving these valuations may not be sustainable. A Bank of America survey in August found that nearly half of fund managers viewed ownership of the seven largest U.S. tech stocks as the most crowded trade in the market.
With mounting concern over inflated valuations and political uncertainty in the U.S., France, and Japan, the BoE’s latest report underscores growing unease about a potential AI-driven financial shock and its global ripple effects.
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