By Editor,John-Paul Ford Rojas

Copyright dailymail

The Bank of England has sounded the alarm over the risk of an AI bubble in financial markets that threatens to send shock waves across the globe.

Officials at the Bank’s Financial Policy Committee (FPC) drew comparisons with the mania for so-called ‘dotcom’ stocks 25 years ago.

And they said share valuations ‘appear stretched, particularly for technology companies focused on artificial intelligence’.

The Bank said the trend left equity markets ‘particularly exposed should expectations around the impact of AI become less optimistic’.

AI-focused tech stocks are concentrated in US markets but many investors around the world have piled in and could be exposed to any downturn.

Bank officials fear stock markets across the globe could also be caught up in any shock, which could also see lending seize up.

It is the Bank’s strongest warning yet that investors appear to be ignoring risks to the AI boom.

While acknowledging that it could yet deliver for investors, they worry that the sheer scale of the investment in the sector, with hundreds of billions of dollars being piled into data centres, has created a heightened risk should it not do so.

The warning came in a quarterly update by the FPC on risks to financial stability.

It also highlighted ‘elevated’ risks associated with geopolitical tensions and ‘global fragmentation’ – at a time when Donald Trump’s tariff wars have upended global trading arrangements – as well as uncertainty created by Trump’s attacks on the US Federal Reserve.

A sudden ‘change in perceptions of Federal Reserve credibility’ could rock the US dollar and jolt bond markets – pushing up government borrowing costs around the world.

‘The risk of a sharp market correction has increased,’ the Bank said. ‘A crystallisation of such global risks could have a material impact on the UK as an open economy and global financial centre.

‘Uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes, and a sudden correction could occur should any of these risks crystallise.’

A ‘sharp correction’ could adversely affect ‘the cost and availability of finance for households and businesses’, the Bank said.

The warning on AI adds to growing disquiet in some quarters about a tech-driven rally that has driven Wall Street share indices to record highs despite global political turmoil.

Companies such as chip maker Nvidia, now the world’s most valuable company, have surged amid market exuberance over the technology.

The Bank did not name any particular stocks that it viewed as overvalued.

But officials have noted that the top five tech firms listed in the US now represent 30pc of New York’s S&P 500 Index, the highest proportion in 50 years.

And they said market data comparing earnings to prices were close to the lowest level in 25 years ‘comparable to the peak of the dot com bubble’.

The Bank noted ‘downside factors’ included disappointing progress on improved AI capability or take-up by customers or increased competition, which could hit valuations.

Other risks included bottlenecks in power supply, data or commodity supply chains required to develop powerful AI models.

But they acknowledged that there were ‘both downside and upside risks’.