A correction in highly valued US technology stocks is likely and could have significant consequences for the global economy because governments and central banks have less room to cushion the impact of a major market decline, according to a European Central Bank blog post.
Investors have poured money into technology companies on expectations that artificial intelligence will transform the global economy. As a result, valuations of leading technology firms have risen well above their historical averages.
The ECB blog said research into previous technological revolutions suggested that current stock market valuations could eventually face a correction. The post stressed that its views do not necessarily represent the official position of the European Central Bank.
Even if AI delivers stronger productivity and higher corporate profits, technology shares could still fall, the authors said. The concern is that investors may have already priced in profit growth that companies will struggle to deliver.
Investor psychology could also intensify any downturn. Excessive optimism can push stock prices well above levels supported by company earnings and other fundamentals. Once confidence fades, investors may sell rapidly, causing prices to decline more sharply than they otherwise would.
The potential impact would extend beyond Wall Street. European households have about €440 billion of exposure to the so-called Magnificent Seven technology companies: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.
European pension funds and insurance companies have a similar level of exposure, making a sharp decline in US technology shares a potential financial stability concern for the region.
The ECB blog said the more serious risk would arise if an equity correction coincided with broader instability across financial markets. Policymakers could have fewer tools available to respond than during earlier crises.
Interest rates provide less room for reductions, while government finances may limit the ability to respond with large fiscal stimulus packages.
The authors contrasted the current environment with the dot-com era, saying today’s starting position leaves policymakers with less capacity to soften the economic consequences of a major market shock.
European stock valuations appear more moderate than those in the United States, but European markets remain closely connected to Wall Street. A major sell-off in US technology shares would therefore be likely to put pressure on European equities as well.
The timing of any correction remains impossible to predict. The blog noted that boom-and-bust patterns in financial markets are often recognised only after the event.
The warning comes as investors and policymakers continue to debate whether the huge sums being directed toward artificial intelligence are supported by realistic expectations of future earnings. A sustained decline in technology shares could affect household wealth, institutional portfolios and business investment across multiple economies.
For now, the ECB researchers said the main uncertainty is not whether market valuations can correct, but when such a correction might occur and whether it would remain limited to equities or develop into a broader financial shock.
