Growing doubts over the economic benefits of artificial intelligence are drawing the attention of financial institutions, with warnings emerging this week about a possible AI investment bubble.
Officials at the Bank of England on Wednesday highlighted the increasing risk that tech stock prices, inflated by the AI boom, could sharply correct.
The U.K. central bank said, The risk of a sharp market correction has increased.
Hours later, the head of the International Monetary Fund echoed the concern. Global stock prices have been surging amid optimism about AI's productivity-boosting potential, IMF Managing Director Kristalina Georgieva said. But she warned that financial conditions could turn abruptly, ahead of the IMF’s annual meeting next week in Washington.
Signs of a potential bubble
Bubbles are notoriously difficult to pinpoint, but there are signs that a bubble may be forming in AI, according to Adam Slater, lead economist at Oxford Economics. He cited rapid growth in tech stock prices, technology stocks now representing about 40% of the S&P 500, market valuations appearing stretched, and widespread optimism about AI’s future despite significant uncertainties.
Optimistic projections suggest generative AI could transform the global economy, producing annual productivity gains unseen since post-World War II Europe. On the other hand, MIT economist Daron Acemoglu projects a more modest U.S. productivity gain of just 0.7% over the next decade. Slater said, You’ve got this incredibly wide range of possibilities. Nobody really knows where it’s going to land.
Investor caution
Investors have closely monitored a string of deals between top AI developers, such as OpenAI, and companies producing the expensive chips and data centers that power these technologies.
Privately held OpenAI, maker of ChatGPT, does not yet turn a profit but is now valued at $500 billion, making it the world’s most valuable startup. It recently signed major deals with chipmakers Nvidia and AMD, and a $300 billion agreement with Oracle for future data center development.
The Bank of England did not single out companies by name but said equity valuations appear stretched, particularly for AI-focused tech firms, and are comparable to the peak of the 2000 dotcom bubble. With tech stocks comprising an ever-larger share of market indexes, the bank warned that markets are vulnerable if AI-related expectations turn less optimistic.
Downside risks include potential shortages of electricity, data, or chips that could slow AI progress, or technological shifts that reduce demand for existing AI infrastructure.
Georgieva added, Current stock valuations are heading toward levels we saw during the internet boom 25 years ago. If a sharp correction occurs, tighter financial conditions could drag down global growth.
Tech leaders push back
Tech executives, however, have downplayed fears of a financial bubble, describing the current AI surge as an industrial rather than a financial phenomenon. Amazon founder Jeff Bezos said the AI boom could benefit society even if some companies fail, comparing it to the biotech bubble of the 1990s that produced life-saving drugs.
Bezos noted that the surge in funding is creating both opportunities and confusion for investors, who struggle to distinguish good ideas from bad in the midst of excitement.
OpenAI CEO Sam Altman warned of short-term misallocations of capital and fluctuations in investment levels but expressed confidence that AI will drive unprecedented economic growth, scientific breakthroughs, and improvements in quality of life.
Nvidia CEO Jensen Huang acknowledged that OpenAI currently lacks the funds to purchase all the chips it needs but expects the company to raise money through revenue growth, equity, or debt. He emphasized that leading AI systems are now moving beyond basic chatbots to higher-level reasoning, capable of accessing online information, analyzing documents, and providing useful outputs.
Future of AI tools
AI developers have been promoting AI agents that go beyond chatbots by performing tasks like coding on behalf of users. However, Forrester analyst Sudha Maheshwari noted that businesses are increasingly scrutinizing whether these tools deliver adequate returns. She warned, Every bubble inevitably bursts, and in 2026, AI will lose its sheen, trading its tiara for a hard hat.
The debate continues over whether the AI boom represents transformative technological progress or a financial bubble poised for correction.
Source: AP