Bank of England warns AI stocks could fall further
Key Points
- AI and semiconductor stocks fell sharply in July, according to the Bank.
- Investors using borrowed money had to sell, which amplified the falls.
- The Bank warned a bigger earnings shock could trigger a sharper correction.
- Global bank lending to hedge funds for trading has doubled since 2023.
The Bank of England warned that AI stocks remain at risk of a sharper correction after a steep fall in July.
The Bank’s Financial Policy Committee (FPC) issued the warning in the record of its 25 September meeting, published on Wednesday (30 September).
AI-related and semiconductor stocks fell sharply in July, the committee said.
Some investors who had used borrowed money to buy these shares had to sell as volatility increased, which pushed prices down further.
The sell-off caused significant losses for some leveraged investors who had concentrated their bets on a small number of stocks.
Markets continued to function in an orderly way, and the losses did not spread to core markets, according to the FPC.
The committee said concerns about whether AI companies can sustain their earnings and spending growth may have weighed on sentiment.
Hedge funds continue to borrow heavily to invest in these markets, while AI share prices remain high and rely on strong expectations of future earnings.
The Bank warned that a bigger shock to those expectations could trigger a sharper fall that spreads to core markets.
Such a shock could come from concerns about how quickly AI develops or how quickly businesses adopt it, the FPC said.
The Bank also noted that global lending from banks to hedge funds for trading shares and other assets has doubled since 2023.
It said demand for this borrowing remained strong alongside momentum in AI-linked share prices.
Equity markets as a whole have so far held up against rising bond yields and tighter financial conditions, the committee added.
