ECB Research: Even if AI Meets Expectations, U.S. Tech Stocks May Correct, Threatening the Eurozone

Economists at the European Central Bank have issued a warning: a pullback in U.S. technology stocks is not only possible but should be seen as an expected outcome—even if artificial intelligence ultimately lives up to all investor expectations, this risk still exists.

ECB researchers Malin Andersson, Stefano Corradin, and others wrote in an official ECB blog post on Monday, presenting two complementary lines of reasoning: First, as AI penetrates the economy more widely, risks will shift from individual companies to the broader economy, investors will demand higher risk premiums, and unless profit growth is sufficient to offset this, stock prices will come under pressure; second, overly optimistic investors may drive valuations above fundamentals, such that when sentiment reverses, the correction could be even more severe.

This warning has direct implications for financial stability in the Eurozone. The researchers note that Eurozone households hold around €440 billion of exposure to U.S. technology stocks, while insurance companies and pension funds also hold considerable positions in the "Tech Big Seven". The researchers wrote, “The shock of the U.S. AI market will not stop at the U.S.," and that if the stock market crashes combined with "broader market turmoil", it will pose a “financial stability threat” to the Eurozone.

Logic for Pullback: Even if AI Succeeds, Stock Prices May Still Fall

The core argument of the ECB researchers is that structural contradictions inherent in tech stock valuations make a correction difficult to avoid, even under rational scenarios.

The researchers explained that in the early stages of AI development, first movers such as Nvidia have significant “option value”—investors are betting on the enormous potential returns from technological breakthroughs, which drives P/E ratios sharply higher. However, once the technology succeeds and spreads through the overall economy, uncertainty shifts from the level of individual companies to the macroeconomic level.

“If any problems subsequently arise with this technology, the entire economy will be impacted,” the researchers wrote. Unlike individual company risk, systemic uncertainty at the economic level “cannot be hedged by portfolio diversification”, leading investors to demand higher returns to compensate for the risks taken on. The rise in this risk premium will act as a drag on stock valuations—even if AI itself is successful, stock prices may ultimately still decline.

Lessons from History: Tech Revolutions and Boom-Bust Cycles

ECB researchers compared the current wave of AI investment enthusiasm to previous technology-driven investment booms, including the 19th-century railway mania, the electricity and radio expansions of the 1920s, and the internet bubble at the start of this century.

“In every case, genuinely transformative technologies attracted massive investment, the companies adopting these technologies saw their stock valuations surge, and then experience steep declines,” the researchers wrote.

They also pointed out that overconfident and overly optimistic investors will push prices above fundamentals, “and when this overconfidence ebbs, the correction can be even more severe than in rational scenarios.” However, the researchers also added that this does not mean prices cannot rise again after a pullback. “If AI proves to be sufficiently transformative, even after a correction, future valuations could still be much higher than they are now.”

It is noteworthy that the Nasdaq 100 index, which is heavily weighted toward tech stocks, saw a sell-off last month but has since rebounded to near historical highs.

Eurozone Exposure: Multiple Channels of Transmission, Limited Policy Room

Although gains in tech stocks have recently been concentrated mainly in the U.S. market, the real risk exposure for Eurozone investors should not be underestimated.

Eurozone households primarily hold around €440 billion in U.S. tech stocks through global index funds, and insurance companies and pension funds also have significant positions in Apple, Alphabet, Microsoft, and the other "Tech Big Seven." The researchers pointed out that U.S. and Eurozone stock markets have historically been highly correlated, and the impact of a U.S. stock decline could be transmitted to the Eurozone through market sentiment, credit conditions, and the labor market.

The researchers also warned that, compared with the aftermath of the internet bubble, policymakers now have “significantly less room to respond to market turbulence”—current interest rates are lower, and there is less fiscal policy flexibility.

“The Eurozone’s smaller and relatively lower-valued tech sector reduces the risk of a spontaneous domestic market crash," the researchers said, "But this is not reassuring: households, insurance companies, and pension funds have large exposures via global index funds, and pressures in U.S. equities have historically affected Eurozone stock markets as well.”