The threat of an AI share price crash rippling out across global markets is putting world financial stability at risk, the International Monetary fund has warned.
In its twice-yearly Global Financial Stability Report, the IMF highlighted the sky-high valuations for AI companies along with their increasing debt pile as one reason that risks in the system are “elevated”.
“The consequences of an AI correction could be global,” it warned. Aside from the US, Asian markets would be most exposed, and the UK and euro area potentially more insulated – though their investors with exposure to the US would be hit.
An AI crash was one of three “salient risks” to stability identified by the IMF, alongside rising government borrowing costs and the threat of a big cyber-attack.
It called this trio of factors “plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil”.
The IMF’s analysis underlined the interconnected nature of big AI companies, and the high levels of borrowing being undertaken to fund investment in the sector.
“Weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by rising leverage, concentrated exposures, and circular financing arrangements,” it said.
Such a reassessment would then “sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers”.
The “magnificent seven” big tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – account for more than ۳۵% of the S&P ۵۰۰ share index in the US, up from ۱۲% a decade ago, and their total market capitalisation has increased by more than ۵۰% in the past two years.
Yet the IMF warned of “growing evidence” that the successful rollout of AI “may not require investment on the massive scale being undertaken by ‘hyperscaler’ firms,” and that “potential economic gains may not be as large as expected”.
The hyperscalers are the companies building the underlying infrastructure for the AI rollout, including many vast datacentres. They include Amazon Web Services, Google, Meta and Oracle.
The IMF also highlighted the growing leverage, or borrowing, that underpins the current boom and could amplify the effects of a crash.
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In particular, it identified soaring debts contracted by the companies themselves; hedge fund investment in the sector; and retail investors borrowing to speculate in AI stocks.
In the event of an AI-led market downturn “these growing sources of leverage heighten the potential for forced selling and surges in equity volatility”, it said.
It also pointed to the prevalence of “circular financing” deals, tying stronger AI companies to weaker partners in the same sector, and potentially exacerbating the impact of a share price correction.
It identified $۳۰۰bn (£۲۲۷bn) worth of transactions between hyperscalers and “weaker AI firms” in just the past three years, supplemented by $۶۵۰bn in debt, in exchange for $۱.۴tn in future financial commitments.
