AI Bubble May Deflate Not Burst as ECB Flags $440B Exposure

The AI bubble is more likely to deflate than burst, according to a Wall Street Journal opinion column, even as European Central Bank economists warn that US tech valuations near historical peaks face correction risk.

"A correction of current stock market valuations is likely," five ECB economists wrote in a blog post published Aug. 17, citing historical patterns from railways, electricity, radio, and the internet where major new technologies still underwent significant market repricing.

The analysis by Malin Andersson, Johannes Breckenfelder, Stefano Corradin, Kalin Nikolov, and Maria Antonietta Viola separated technological success from investment returns. Euro area households hold roughly €440 billion in US technology equities, with insurers and pension funds also exposed to the Magnificent Seven — Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, and NVIDIA.

The stakes extend beyond Wall Street. A sharp correction in US AI stocks could trigger fund redemptions, forced selling, and broader financial stability concerns across the euro area, the ECB economists warned. "A US AI fallout would not remain a US problem," they wrote.

Merrill Sees a Speed Bump, Not a Peak

Merrill Lynch Chief Investment Officer Chris Hyzy offered a contrasting view, characterizing the recent sell-off — which saw the MSCI Global Semiconductor Index fall more than 20 percent from its June peak — as a temporary tactical reset driven by short-term de-risking and forced unwinding of over-leveraged positions rather than deteriorating fundamentals.

Hyzy noted that hyperscaler capital expenditures continue to expand rapidly through 2027 alongside persistent shortages in compute and power infrastructure. He attributed the market friction to natural adjustments as tech firms transition from foundational model training toward agentic systems, physical AI, and eventual quantum computing — shifts that often generate brief operational and valuation "speed bumps" as supply networks coordinate complex deployments.

Historical data from BofA Global Research supports the bullish case. Following 20 percent pullbacks in global semiconductors since 1999, the index generated an average 12-month return of 44 percent when a recession was avoided. US semiconductors demonstrated even greater resilience, gaining an average of 49 percent over the subsequent year. BofA's Global Wave indicator has remained positive for six consecutive months, while global earnings revision ratios sit at 1.0 — and for semiconductor firms specifically, revisions reached a four-and-a-half-year high of 1.41.

Hyzy is also monitoring credit risk metrics, including widening credit spreads on debt financing for AI companies and rising costs of credit default swaps. These indicators are receiving heightened scrutiny as 30-year Treasury yields climb to levels not seen since 2007. However, macro-level risk remains contained, with global cycle indicators showing no signs of an impending downturn.

Anthropic's IPO Shows How Far Valuations Reach

The valuation debate is playing out in real time at Anthropic, where bankers and prospective investors are using a 2028 revenue forecast of roughly $190 billion to $200 billion as part of the IPO pricing process. The company's revenue run rate crossed $47 billion by May, meaning the valuation hinges on growth several times larger than current business.

The ECB economists acknowledged that current valuations could rise considerably further before any correction. "This does not mean that today's prices represent a ceiling," they wrote. But they argued that the structure of European exposure — much of it indirect through mutual funds and ETFs — could push a downturn deeper through redemption spirals. If a sharp correction prompts investors to redeem money from funds, those funds would be forced to sell assets, pushing valuations lower and triggering additional redemptions.

The economists also noted that euro area valuations remain considerably below US levels, with the region's information and communications technology sector showing more resilience than during the dot-com period. They described Europe's AI transformation as proceeding at a "steady if unspectacular pace," reducing the likelihood of a domestically generated correction — but not insulating the region from events across the Atlantic.

For investors, the question is not whether AI will change the economy — most analysts agree it will — but whether current valuations already price in that change. The ECB's warning suggests European portfolios could face meaningful downside if US tech stocks correct, while Merrill's historical data points to potential buying opportunities after pullbacks. With 30-year Treasury yields at levels not seen since 2007, the cost of capital for AI infrastructure buildout is rising, adding another variable to the valuation equation.

This article is for informational purposes only and does not constitute investment advice.