Fear of lost profits led to inflated valuations of bigtechs, ECB confident. What are the risks

The European Central Bank said investors' fear of missing out on the rally - FOMO - is pushing valuations of U.S. tech giants too high. According to the regulator, current quotes do not reflect the growing risks and high uncertainty, which makes the market vulnerable to a sharp correction.

Investors' fear of lost profits has led to inflated valuations of U.S. tech companies like Nvidia, Alphabet, Microsoft and Meta, the European Central Bank said Wednesday in its Financial Stability Review. After a temporary sell-off in April triggered by Donald Trump's import duties, markets have returned to a "risk-on mood," which has lifted already high valuations of U.S. bigtechs even further, the ECB added.

"Current market pricing does not seem to take into account the ongoing risks and high uncertainty," the paper said. "Markets are laying down a very favorable scenario assuming that AI will be fully implemented and adopted worldwide," ECB Vice President Luis de Guindos, quoted by the Financial Times, added in a statement to reporters. He said investors are either hoping "the worst risks don't materialize" or are driven by "fear of missing out on a continued rally."

"Growing market concentration" amid "persistently high valuations" could lead to "sharp, interconnected price corrections" if things do not go as investors expect, the ECB warned. "If the optimistic AI scenario does not become reality and there is a disruption in the near future, [bigtech] valuations could undergo a major correction," Luis de Guindos added. According to the ECB report, one factor that could trigger such a correction is "market concerns about central bank independence and the state of U.S. government debt." According to the European regulator, soaring borrowing under the Trump administration could also destabilize the U.S. Treasury bond market. This, in turn, would cause stress in global debt markets and could lead to a reassessment of sovereign risks in the eurozone itself.

Nevertheless, the ECB spokesperson admitted that a correction in the market would not necessarily mean a "bursting AI bubble". Although "valuations are questionable," the regulator does not believe that a bubble has formed in the market in principle. The bank recognized that the current tech boom is quite different from the dot-com crisis of the 2000s: today's AI companies are highly profitable, have strong revenue growth, low debt loads and have diversified businesses rather than relying solely on AI. And in the early 2000s, the rally was based primarily on unprofitable startups.

The ECB also warned that "opaque private markets" could exacerbate the equity slump - leading to asset sell-offs at heavily undervalued prices and hitting European insurers, pension funds and asset managers already facing liquidity problems and higher debt loads.

This article was AI-translated and verified by a human editor