The central bank’s Financial Policy Committee said investors remained vulnerable to disappointment over AI earnings, adoption and infrastructure spending. Its September assessment, published on 30 September, identified growing links between technology shares, debt markets and leveraged investment strategies that could magnify any sell-off.
The warning has acquired greater significance following renewed volatility in technology stocks. A sharp Wall Street decline last week highlighted investor concerns about the financing and profitability of data centres, while lenders have become more selective about funding projects dependent on sustained demand for computing capacity.
The Bank did not predict an imminent crash. Instead, it cautioned that high valuations, concentrated ownership and borrowing could turn a reassessment of future profits into a more disruptive adjustment affecting investors beyond the technology sector.
Its committee said AI-related and semiconductor shares had already fallen sharply in July. The decline forced some leveraged investors to unwind positions, amplifying price movements. Although certain funds suffered significant losses, trading remained orderly and the disruption did not spread into core financial markets.
The committee nevertheless judged that the danger of a more severe correction persisted. Valuations continued to reflect strong expectations for future earnings, leaving share prices sensitive to doubts about the speed at which businesses could deploy AI and generate returns.
Borrowing is adding another dimension to the risk. The Bank cited estimates by Morgan Stanley that global AI-related debt issuance had reached approximately $450 billion by early September, more than twice the total for the whole of 2025.
It also cited estimates by JPMorgan analysts suggesting that around $4.1 trillion of AI-related capital expenditure could be financed through debt issuance between 2026 and 2030. These are projections rather than confirmed future borrowing commitments.
The committee expressed concern about opaque financing structures and arrangements in which technology companies invest in AI businesses that subsequently purchase services or equipment from their investors. Such transactions can complicate assessments of underlying demand and financial exposure.
Higher debt levels could intensify losses if anticipated revenues fail to materialise. Investors may then demand more expensive financing, potentially forcing companies to scale back construction and equipment purchases, with consequences for suppliers and creditors.
The Bank’s July Financial Stability Report had already highlighted the concentration of AI exposure within major equity benchmarks. It estimated that AI-related companies represented around half the market capitalisation of the S&P 500, compared with approximately a quarter in 2022.
That concentration matters because declines in a relatively small group of large companies can pull down widely held index funds. Borrowed positions and momentum-driven trading could add pressure as investors sell assets to meet margin requirements or reduce exposure.
The Bank examined a hypothetical scenario involving a 45% decline in US equities over six quarters, accompanied by wider corporate credit spreads and dollar depreciation. Its modelling indicated that the shock could reduce UK gross domestic product by 2.2 percentage points.
That exercise was a stress scenario, not a forecast. The Bank said UK lenders had demonstrated resilience to shocks of comparable severity in previous capital stress tests, while acknowledging that disorderly conditions in sovereign bond markets could worsen the consequences.
The central bank also recognised that AI could improve productivity and support longer-term economic growth. Its concern centred on uncertainty over the timing and scale of those benefits, and whether corporate earnings would ultimately justify the investment already reflected in share prices.
Financial stability risks extend beyond publicly traded shares. Private credit funds, structured financing vehicles and bond investors are increasingly involved in funding data centres and related infrastructure, making the distribution of potential losses harder to assess.
The committee also drew attention to operational threats arising from increasingly capable AI systems. It said incidents involving autonomous models taking unexpected actions in test environments reinforced the need for financial firms to strengthen cyber defences and contingency planning. Those concerns are distinct from stock valuations but could interact with market stress if technological failures disrupt financial services.
The September committee meeting maintained the UK’s countercyclical capital buffer at 2%, leaving the additional capital requirement for banks unchanged while officials continued monitoring risks from asset valuations, credit markets and government borrowing.
Follow Arabian Post
Select Arabian Post as your preferred source on Google and MSN News for trusted business news and Arab politics and updates.
