BoE raises sudden market correction warning as AI stocks reach dotcom bubble levels

The BoE has issued a fresh warning that soaring AI stock valuations are pushing global markets into dangerous territory, drawing direct comparisons to the dotcom bubble.

The alert came from the central bank’s Financial Policy Committee (FPC), which published the findings from its latest meeting this week.

According to the committee, “the risk of a sharp market correction has increased” as equity prices, especially in AI-focused tech firms, have climbed to levels not seen since the early 2000s.

The committee pointed to overpriced equities, US credit market cracks, global political tensions, and AI hype-fueled optimism as all feeding into a volatile mix.

The BoE said these factors are raising the chances of a sudden drop in asset prices that could hit investors hard. And if expectations around AI’s impact change, even slightly, that could be the tipping point.

Defaults hit US credit while AI dominates market indices

The BoE flagged rising stress in the US auto credit sector. Two companies, Tricolor, a subprime auto lender, and First Brands, a car parts supplier, have recently defaulted. Both were heavily reliant on private credit loans and invoice financing, forms of funding the Bank has already described as risky.

The committee wrote that these defaults highlight ongoing concerns around “high leverage, weak underwriting standards, opacity, and complex structures.”

In short, some companies are still borrowing big with weak oversight and betting on fragile financing models. The result? More defaults may be coming.

Meanwhile, the BoE pointed out that credit market spreads, the gap between interest rates for risky vs. safe borrowers, have now shrunk to levels “close to historically low,” which leaves little room for error if economic conditions change.

The Bank also drew attention to political pressure on the US Federal Reserve, warning that it “could result in a sharp re-pricing of US dollar assets.” With Donald Trump back in the White House and congressional gridlock affecting France and Japan, the committee sees political standoffs as another layer of risk. These deadlocks could spill into debt markets and shake investor confidence further.

Tech valuations stretch beyond reality, says BoE

What really alarmed the BoE was the level of concentration in stock markets—especially the way AI firms are driving the entire rally. The Bank noted that the S&P 500 is now trading at a forward price-to-earnings ratio of 25 times, a level that’s elevated when compared to past averages. While that’s still under the dotcom peak, it’s well beyond what many would call healthy.

And it’s not just the pricing. The top five tech firms, almost all AI-heavy, now make up nearly 30% of the S&P 500. That kind of dominance means the whole market is tied to just a handful of players. If AI hype weakens, the BoE said, investors could see wide-scale losses. It also cited the cyclically adjusted price-to-earnings ratio, which has dropped to levels not seen in 25 years, right in line with the dotcom bubble’s peak.

At the same time, the BoE said UK credit markets are in better shape. It reported that UK household debt-to-income levels are the lowest since 2001, and company debt remains “significantly below” recent highs. The committee added that the UK’s banking system “remained resilient” despite global financial pressure.

But the committee isn’t ignoring signs of pressure at home. It confirmed that “a number of UK lenders” have started issuing more high loan-to-income mortgages, using flexibility allowed by UK regulators. And in a final note, the committee said the FPC is reviewing the availability of finance for smaller UK companies, signaling that access to credit could become a new concern.

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