AI Stock Prices Divorced From Fundamentals, BoE Implies

Stock prices in the artificial intelligence sector have become divorced from fundamentals, the Bank of England has implied in a new report. The Financial Policy Committee (FPC) warned that this disconnect has created “stretched” valuations and an elevated risk of a “sharp market correction.”
The fundamentals, according to an MIT study, are weak: 95% of organizations are seeing no financial return from their generative AI investments. The stock prices, however, are strong, with OpenAI’s valuation soaring to $500 billion. The FPC sees this gap as a major source of instability.
The committee’s report suggests that the market is currently running on narrative and optimism, not on profit and loss statements. It warns that when the market is inevitably forced to focus on the fundamentals, a painful “re-evaluation of currently high expected future earnings” will occur.
This potential correction is made more dangerous by a fundamental threat to the global financial system itself: political attacks on the independence of the US Federal Reserve. This could trigger a “sharp repricing of US dollar assets,” a shock that would reverberate worldwide.
The FPC concluded that the UK is highly exposed to the consequences of this divorce from fundamentals. The “risk of spillovers… is material,” and a market that returns to reality could do so with a crash that harms the British economy.