Global stock indices are at risk of a sharp decline as enthusiasm for artificial intelligence (AI) drives share prices to levels similar to the dotcom bubble of the early 2000s, the International Monetary Fund (IMF) and the Bank of England (BoE) have warned.
Kristalina Georgieva, managing director of the IMF, noted that optimism about the potential of AI to raise productivity “could change abruptly” and affect the global economy.
In a speech ahead of next week’s IMF annual meetings, Georgieva said: “current valuations are approaching the levels we saw during the Internet enthusiasm 25 years ago.”
Georgieva’s statements came a few hours after the BoE body in charge of ensuring financial stability also drew parallels with the 2000 crash that followed the dotcom boom, warning about the risk of a “sudden correction” in global financial markets.
The BoE’s Financial Policy Committee (FPC) warned in the minutes of its latest meeting, published on Wednesday, that “the risk of a sharp stock market correction has increased.”
The figures that worry
To determine whether the price of a stock is “expensive” or “cheap”, we consider how many times the value of the stock exceeds the company’s profit. For example, if today a stock is trading at a price equivalent to 20 times its earnings per share, while ten years ago it was 12 times, the stock is considered expensive today; and vice versa.
The BoE Financial Policy Committee stated that the value of US stocks in terms of their earnings has approached the levels of 25 years ago, “comparable with the peak of the dotcom bubble.”
The S&P 500 index trades at 25 times its estimated 12-month earnings, above historical averages.
The index has accumulated a rise of 14% so far this year, after the rebound after the tariffs announced by Donald Trump in April.
These valuations, although still below those of 2000, are seen as a possible source of financial instability.
Potential impact on the global economy
Georgieva warned that a sudden drop in stock markets “could slow down global growth, reveal vulnerabilities and especially complicate the situation in developing countries.”
The organizations asked investors and regulators to be alert to the risks of an abrupt price adjustment after the technology boom, similar to what occurred 25 years ago.
The IMF will address these risks at its annual meetings next week, where it is expected to present new economic projections and recommendations to contain volatility in markets.
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