ECB "Beware of AI 'Bubble'... Reliance on Few Companies Only"

"Tensions Rise Ahead of Trump’s Return to the White House"

The European Central Bank (ECB) expressed concerns about a 'bubble' in AI-related stocks, major foreign media reported on the 20th (local time).

In the Financial Stability Report (FSR) released that day, the ECB stated that the U.S. stock market has become increasingly dependent on a small number of companies considered beneficiaries of the AI boom.

[Image source=EPA Yonhap News]

The ECB said, "This phenomenon concentrated in a few large companies raises concerns about the possibility of an asset price bubble related to AI," adding, "In a situation where global stock markets are closely integrated, if earnings expectations for these companies are disappointing, there is a risk that the global ripple effects could be negative."

Although the ECB did not specifically mention the return of U.S. President-elect Donald Trump to the White House, it expressed concerns about escalating global trade tensions. President-elect Trump has repeatedly pledged to impose universal tariffs of 10-20% on all imports and a 60% tariff on imports from China. The ECB stated, "Global trade tensions are rising, and there is a growing concern that protectionist tendencies worldwide could strengthen further," adding, "There is increasing worry that this could negatively impact global growth, inflation, and asset prices."

As a risk factor for the Eurozone economy, the ECB cited low growth rather than inflation. The Eurozone's economic growth rate in the third quarter recorded 0.4%, the highest in two years. The inflation rate in October was 2%.

Luis de Guindos, ECB Vice President, said in an interview with CNBC that uncertainty about the European economic outlook will increase due to President-elect Trump. Vice President de Guindos said, "It is very important to emphasize that the evolution of inflation has been positive. However, at the same time, the growth outlook is not good."

He added, "There are also geopolitical risks such as Ukraine and the Middle East. And the policies that the new U.S. administration may implement represent another layer of uncertainty regarding the future of the European economy."

Meanwhile, the ECB pointed out that since the report released last May, financial market volatility has increased again, and due to excessively high asset valuations and risk concentration, the potential for volatility is greater than usual.