IMF warns of risks as AI asset bubble threatens global markets

The International Monetary Fund has issued a stark warning to investors and policymakers about mounting vulnerabilities in the global financial system. Its twice-yearly financial stability report highlights significant complacency in the markets despite elevated government debt, volatile asset valuations, and heightened trade tensions.

According to the IMF, markets have recently priced in ambitious productivity gains from artificial intelligence, driving technology and AI-related stocks to record highs. This optimism has fuelled what many analysts now see as an “AI bubble”. The Washington-based organisation warns that if these expected gains fail to materialise, tech stock valuations could face a sharp correction similar in magnitude to the infamous dotcom crash at the turn of the millennium.

Measures of market volatility dropped to their lowest levels in September even as global equity markets surged. Investors seem to have discounted the potential negative effects of tariffs, geopolitical uncertainty and growing government indebtedness. The IMF cautions that such complacency can become dangerous, especially when asset prices become increasingly detached from economic fundamentals.

Recent turbulence in US markets has already offered a glimpse of potential fragility. A single day of trading wiped off significant value following threats of sweeping tariffs on Chinese goods by Donald Trump. The bankruptcy of a major American auto parts supplier last month has also raised alarms about private credit markets, with lenders scrambling to recover billions in lost funds.

The IMF notes that the dominance of a small cluster of tech giants in major indices increases systemic risks. Much of the expansion in the AI sector has been funded by less regulated forms of private credit, amplifying concerns about financial stability should a sudden valuation reset occur.

Bond markets too remain sensitive to concerns about inflation and ballooning government deficits. Long-term sovereign debt in the UK, US, and Europe has only recently stabilised following a sharp sell-off, while central banks face mounting pressure to navigate inflationary pressures alongside political demands for easier monetary policy.

Despite these challenges, some remain optimistic. Bank of England governor Andrew Bailey maintains faith in AI’s transformative potential for mature economies grappling with stagnating productivity rates. Whether this optimism prevails or gives way to financial turbulence may hinge on whether AI lives up to lofty expectations in the years ahead.