UK share values ‘most stretched’ since 2008, Bank warns

The Bank of England has warned of a “sharp correction” in the value of major tech companies due to growing fears of an artificial intelligence (AI) bubble.

It said share prices in the UK are close to their “highest increases” since the 2008 global financial crisis, while equity valuations in the US are reminiscent of before the dotcom bubble burst.

The central bank’s financial stability report warns that valuations are “particularly inflated” for companies focusing on AI.

It said the sector’s growth over the next five years would be fueled by trillions of dollars of debt, increasing the risk to financial stability if companies’ value fell.

The Bank of England, citing industry data, has estimated that spending on AI infrastructure could exceed $5tn (£3.8tn).

It said most of it would be funded by the AI ​​firms themselves, but about half would come from external sources, mostly through debt.

“The deepening relationship between AI firms and credit markets, and the growing interconnections between those firms, means that, even as asset prices recover, losses on lending could increase financial stability risks,” it said.

The Bank of England is the latest institution to sound the alarm over the potential decline in the value of AI firms, reminiscent of past events such as the financial crisis and the dotcom bubble.

JPMorgan Chief Executive Jamie Dimon told the BBC in October that he was “far more concerned than others” about the risk of a severe market correction in the coming years. The International Monetary Fund (IMF) also warned of a “sudden, sharp recovery”, saying in a recent report that markets appear “complacent”.

The dotcom boom refers to a period in the late 1990s during which the values ​​of early Internet companies soared amid a wave of optimism for new technology, before the bubble burst in early 2000 – causing many share prices to collapse.

This led to the closure of some companies, resulting in the loss of jobs.

A fall in share prices could also impact the value of people’s savings, including pension funds.

Fears of an AI-related stock market correction arose after Chancellor Rachel Reeves used her Budget to encourage savers to park cash in stocks and shares by reducing the amount they can save in cash.

In its latest report, the Bank of England said risks to financial stability have increased through 2025, citing geopolitical tensions, the global trade war and rising borrowing costs for governments.

It said rising tensions between countries have particularly increased the likelihood of cyber attacks and other disruptions.

Elsewhere in the Financial Stability Report, the Bank of England warned that home owners moving out of fixed rate mortgages over the next two years would face a £64 increase in their monthly payments.

The central bank said the typical owner-occupier coming out of a fixed rate would see their bills rise by 8% as higher interest rates continue to take effect.

Overall, 3.9 million people, or 43% of mortgage holders, are expected to refinance at higher rates by 2028, the bank said.

But that period will see monthly payments drop by a third, it said, as interest rates have fallen significantly since the increase in 2022.

The Bank of England’s base rate, which affects the cost of borrowing for individuals, including mortgages, has fallen from a peak of 5.25% to 4% in 2024.