Tech stock rally driven by AI hype sparks bubble fears

Some worry stock market valuations could tumble if investors' expectations are unmet

- Angela Tan Senior Business Correspondent

Investors in Singapore and elsewhere are getting more nervous over whether the tech rally that has carried share prices to record highs is a sign of enduring strength or a bubble about to burst.

More analysts are warning about a bubble originating in big US tech stocks and artificial intelligence (AI) spending that have extended to global markets, including Singapore, which takes its cue from Wall Street.

Recently, JPMorgan’s chief executive officer Jamie Dimon noted there are “a lot of assets out there which look like they’re entering bubble territory”.

One major central bank is so worried that it issued a warning in early October.

The Bank of England’s financial policy committee warned that “the risk of a sharp market correction has increased”, and that equity market valuations appear stretched, particularly for technology companies focused on AI.

This leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic, it said.

It also flagged concerns that, as an open economy with a global financial centre, the risk of spillovers to Britain’s financial system from such global shocks is “material”.

The International Monetary Fund (IMF) has also weighed in, warning that valuation models show risk asset prices have exceeded fundamentals, raising the risk of sharp corrections.

IMF’s chief economist Pierre-Olivier Gourinchas said while the direct impact on financial stability may be limited, there was a possibility an AI correction could lead to broader repricing of assets that could put stress on non-bank financial institutions.