Key facts
- The AI-linked rally in global stock markets is showing growing signs of vulnerability, according to the Bank for International Settlements (BIS).
- Investors are becoming 'increasingly cautious' about the profitability of future AI investments, the BIS said.
- Leverage at major U.S. tech firms has been rising, contributing to market vulnerability.
- AI-connected stocks fell sharply on Monday after AI firm leaders warned about the pace of technological development.
- The BIS report also pointed to strains on public finances, geopolitical tensions, and volatile energy prices.
- Aggregate borrowing by tech firms has risen from $22 billion in 2010 to over $1 trillion by 2025, the BIS report stated.
The Bank for International Settlements (BIS) warned on Monday that the AI-driven rally powering global stock markets is showing increasing signs of vulnerability. In a new report, the BIS stated that investors are becoming 'increasingly cautious' about the profitability of future AI investments, particularly as leverage among major U.S. tech firms continues to rise.
Frank Smets, the BIS' head of economic analysis, told reporters on Friday that the AI momentum, which had propelled equity markets and supported global economic resilience over the past year, has begun to exhibit growing signs of vulnerability. AI-connected stocks experienced a sharp decline on Monday following weekend warnings from top AI firm leaders about the need to slow the technology's development to mitigate existential threats.
The BIS report also highlighted an uncertain global economic backdrop, characterized by strains on public finances, exacerbated geopolitical tensions, and volatile energy prices. The hundreds of billions of dollars in debt issued by AI firms could be contributing to rising borrowing costs in government bond markets, in addition to existing concerns about overall debt sustainability. Smets linked these pressures in bond markets to 'fiscal fragility that comes also with higher uncertainty in the world economy.'
Despite these concerns, Smets noted that there were 'no signs of stress' overall and that investors' risk appetite had remained 'remarkably resilient' in recent months. However, he added that the sustainability of this resilience, especially if upward pressures on yields persist, remains uncertain. Smets also echoed BIS chief Pablo Hernandez de Cos' recent warning about the financial stability risks associated with AI, expressing particular concern over the rapid increase in debt and leverage, often through opaque, off-balance-sheet financing deals.
The report also examined private market funding for AI, noting that aggregate borrowing by tech firms has surged from approximately $22 billion (22% of total private credit) in 2010 to over $1 trillion (44%) by 2025, with total outstanding loans of any type nearing $2.5 trillion. Separately, a BIS study using AI to analyze central bank speeches indicated a more frequent and varied use of 'core inflation' metrics, suggesting that the growing complexity of central bank messaging may challenge effective communication with the public.