ECB’s Vujcic warns AI-fueled stock rally is prone to correction

European Central Bank Vice President Boris Vujcic warned on Tuesday that soaring market valuations fueled by the artificial intelligence boom have left equity markets vulnerable to a pullback, adding his voice to a growing chorus of concern from Europe's top monetary officials.

"This is something which we have also not seen, or have not seen for a long time, this kind of price earnings, price to forward earnings ratios," Vujcic said on the ECB's "Euro Matters" podcast published Tuesday. "They might in the end, end up being justified, but they might not."bloomberg

A Central Bank Consensus Takes Shape

Vujcic's remarks build on warnings that have been escalating within the ECB for weeks. ECB President Christine Lagarde said Monday that AI sector valuations are "very high" and a pullback is "entirely possible." The comments followed an August 17 ECB blog post by five of the bank's economists who concluded that "a correction of current stock market valuations is likely" and that for the euro area, this would represent "a financial stability issue, rather than just a private one."moomoo+2

That analysis, authored by Malin Andersson, Johannes Breckenfelder, Stefano Corradin, Kalin Nikolov, and Maria Antonietta Viola, found that eurozone households hold roughly €440 billion in exposure to the seven largest U.S. tech stocks — Apple ↗ 0.24%, Microsoft ↗ 1.97%, Nvidia ↘ 3.36%, Alphabet ↗ 3.06%, Amazon Amazon.com, Inc. ↘ 1.26%, Meta ↗ 2.71%, and Tesla ↘ 1.77% — much of it accumulated through passive index-tracking funds.ecb.europa

Valuations at Historic Extremes

The S&P 500's Shiller cyclically adjusted price-to-earnings ratio has remained above 40 since May, a level last sustained just before the peak of the dot-com bubble in March 2000. The ECB blog post noted that U.S. valuations are "currently close to their historical peak" and argued that historical patterns of technological revolutions — from railways to the internet — point to an eventual correction regardless of whether current prices are rational.moomoo+1

Yet the ECB has been careful to temper its warnings. Its economists stressed they are not forecasting a crash, noting that the timing of any pullback is "unknowable in advance" and identifiable only in hindsight. "This does not mean that today's prices represent a ceiling," the blog post stated. "If AI proves to be transformative enough, valuations could still be much higher in the future, even after a correction."ecb.europa

Thinner Cushions This Time

What distinguishes the current moment from the dot-com era, according to both Vujcic and the ECB's analysis, is the limited policy space available to absorb a shock. Interest rates remain elevated, and public debt levels are higher than they were in 2000, leaving policymakers with fewer tools to restore calm if a correction coincides with broader instability.moomoo+1

Vujcic also flagged geopolitical tensions and unsustainable fiscal positions in some countries as additional risks. "We've learned from past experience that what is unsustainable remains unsustainable," he said, urging early action on fiscal vulnerabilities before markets force the issue.moomoo