ECB Warns US Tech Stocks Overvalued Amid AI-Driven FOMO

ECB Flags Potential AI Bubble in US Tech Stocks

The European Central Bank (ECB) has issued a warning about the soaring valuations of major US technology stocks, such as NVIDIA, Alphabet, Microsoft, and Meta, suggesting they have become "overvalued" due to what it termed a "fear of missing out" (FOMO) mentality.

The warning came in the ECB's latest Financial Stability Review, echoing similar cautions from other institutions like the International Monetary Fund (IMF) and the Bank of England. The report highlights that market sentiment has been fueled by a "fresh bout of risk appetite" since a brief sell-off triggered by former US President Trump's trade tariffs, leading to "further increases in already high valuations." It suggests investors are either betting that "tail risks will not materialize" or are driven by the fear of missing out on potential gains.

Market Risks and Potential Volatility

While the ECB did not name specific companies, it highlighted the "increasing market concentration" in the context of "persistently high valuations." It cautioned that any negative surprises could lead to "large and correlated price corrections."

However, ECB Vice President Luis de Guindos clarified that a market correction would not necessarily signify a "bursting bubble." He emphasized that while there were "doubts" about valuations, the ECB had not concluded that an actual bubble exists.

AI Scenarios and Potential Pitfalls

"The market is pricing in a very optimistic scenario – a full application and global diffusion of AI," de Guindos said, adding that investors believe artificial intelligence-related business plans will succeed as anticipated.

"If this scenario does not materialize, if surprises come in the near future, perhaps valuations will face a significant correction," he added.

Comparison to the 2000 Dot-Com Bubble

The report acknowledged that the current tech frenzy differs from the dot-com bubble of 2000, as companies today have "high profit margins, strong earnings growth, low debt, and diversified core businesses apart from AI."

In contrast, the surge 25 years ago was fueled by loss-making startups. However, the report cautioned that "opaque private markets" could amplify market declines this time around, potentially leading to "fire sales" and impacting European insurers, pension funds, and asset managers with "persistent liquidity and leverage vulnerabilities."

Other Political and Economic Risks

The report identified "market concerns about central bank independence and US debt" as potential scenarios that could trigger a market correction. President Trump has repeatedly lashed out at Federal Reserve Chairman Powell and attempted to remove Fed Governor Cook, although his term is set to end next May.

The ECB also expressed concern that ever-increasing borrowing under the Trump administration could trigger a collapse in the US Treasury market. The report stated that this could "trigger stress in global benchmark bond markets" and could "prompt a broader market reassessment of euro area sovereign risk."

Furthermore, the report warned that a new European sovereign debt crisis could erupt as France struggles to control its massive deficit.

While the report did not name the Eurozone's second-largest economy specifically, it pointed out that some euro area countries have "more fragile political landscapes," are violating EU deficit rules, and are failing to adhere to planned budgets. "Weak fiscal fundamentals in some euro area countries... could test investor confidence and trigger bond market stress," the ECB concluded.