AI valuations heighten risk of ‘sharp correction’ in stock markets, Bank of England warns – business live

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Introduction: Bank of England warns of risk of 'sharp correction' due to AI valuations

Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.

Risks to the financial stability of the UK have increased during 2025, the Bank of England is warning this morning, as it cites the risk of a stock market crash triggered by highly-valued AI companies.

The Bank is issuing its latest assessment of the UK financial system, and warning that the global risks threatening the country remain “elevated”, citing geopolitical tensions, fragmentation of trade and financial markets, and pressures on sovereign debt markets.

These elevated geopolitical tensions increase the likelihood of cyberattacks and other operational disruptions, the Bank points out, also citing the “material uncertainty in the global macroeconomic outlook”.

And the Bank singles out the surge in valuations of artificial intelligence companies this year, saying that this “heightens the risk of a sharp correction”.

The Bank’s Financial Policy Committee say that many risky asset valuations remain “materially stretched”, particularly for technology companies focused on AI, adding:

Equity valuations in the US are close to the most stretched they have been since the dot-com bubble, and in the UK since the global financial crisis (GFC). This heightens the risk of a sharp correction.

AI companies have been driving the US stock market higher this year. Shares in chipmaker Nvidia, for example, are up 34% this year despite a 10% drop in the last month.

The FPC also sounds the alarm about the use of debt financing in the AI sector, and the web of multi-billion dollar deals between the various companies, explaining:

By some industry estimates, AI infrastructure spending over the next five years could exceed five trillion US dollars. While AI hyperscalers will continue to fund much of this from their operating cash flows, approximately half is expected to be financed externally, mostly through debt.

Deeper links between AI firms and credit markets, and increasing interconnections between those firms, mean that, should an asset price correction occur, losses on lending could increase financial stability risks.

More details to follow…

The agenda

7am GMT: Nationwide house price index for November
7am GMT: Bank of England publishes its latest Financial Stability Report,
7am GMT: Bank of England publishes its latest stress test results
10am GMT: Bank of England press conference with governor Andrew Bailey, and deputy governors Sarah Breeden and Sam Woods
10am GMT: OECD releases its latest economic outlook
10am GMT: Treasury Committee hearing on the budget with the OBR

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Bank: the UK is exposed to global shocks

The good news from today’s financial stability report is that the Bank of England believes the UK banking system is well capitalised, maintains robust liquidity and funding positions, and asset quality remains strong.

UK household and corporate aggregate indebtedness remains low too.

But, today’s Financial Stability Report also warns that the UK is notably vulnerable to global shocks that ripple through the global economy, saying:

As an open economy with a large financial centre, the UK is exposed to global shocks, which could transmit through multiple, interconnected channels. Stress in one market, such as a sharp asset price correction or correlation shift, could spillover into other markets.

Simultaneous de-risking by banks and non-banks can lead to fire sales, widening spreads and tightening financing conditions for UK households and corporates. Market participants should ensure their risk management incorporates such scenarios.

Rising government debts are another threat, the Bank adds, reminding us that public debt-to-GDP ratios in many advanced economies have continued to rise this year.

The Financial Policy Committee say:

Governments globally face spending pressures, given the context of changing demographics and geopolitical risk, potentially constraining their capacity to respond to future shocks. Significant shocks to the global economic or fiscal outlook, should they materialise, could be amplified by vulnerabilities in market-based finance (MBF), such as leveraged positions in sovereign debt markets.

[MBF is the name for the network of markets (for shares, debt or derivatives) the companies which use them such as investment funds and insurers, and market infrastructure].

Bank: corporate defaults could impact bank resilience and credit markets

The Bank of England also cites the credit markets as a potential risk to the economy.

It points to the failure this autumn of US companies First Brands and Tricolor, which have already raised concerns about weak lending standards and potential threats from the so-called shadow banking sector.

The financial stability report says:

Credit spreads remain compressed by historical standards.

Two recent high-profile corporate defaults in the US have intensified focus on potential weaknesses in risky credit markets previously flagged by the FPC. These include high leverage, weak underwriting standards, opacity, complex structures, and the degree of reliance on credit rating agencies, and illustrate how corporate defaults could impact bank resilience and credit markets simultaneously.