The European Central Bank warns of bubble risks from the "seven giants" of the U.S. stock market, with sharp declines potentially affecting global markets

According to the Zhitong Finance APP, the European Central Bank warned investors on Wednesday that concentrating too much capital in U.S. technology stocks, especially the "Magnificent Seven" and other popular artificial intelligence-related stocks, may pose a potential "asset price bubble." The European Central Bank pointed out, "In recent years, the market capitalization and profit concentration of a few technology companies (especially in the U.S.) have significantly increased, raising strong concerns about the possibility of an asset price bubble related to artificial intelligence (AI)."

"The extremely high concentration of market capitalization of a few large technology companies in the S&P 500 index has raised investors' concerns about the possibility of an asset price bubble related to AI," the European Central Bank noted in its latest Financial Stability Assessment report. "Moreover, in the context of deep integration of global stock markets, if the earnings expectations of these large technology companies are disappointing, it could trigger very adverse global spillover risks."

The European Central Bank also expressed concerns about excessive capital investment in a few large technology companies globally. The report stated, "In recent years, the concentration of market capitalization weight and earnings per share weight in benchmark stock market indices has significantly increased among a few technology giants, especially in the U.S."

The European Central Bank pointed out that the "Magnificent Seven" (i.e., the seven major U.S. tech companies) now account for more than 30% of the total market capitalization of the S&P 500 index. The report specifically highlighted the high proportion of the "seven tech giants" in the market capitalization of the S&P 500 index. The report argues that in the context of deep integration of global stock markets, if the earnings expectations of these companies fall short, this "price bubble" could suddenly burst, leading to very adverse spillover effects on global financial markets.

The "Magnificent Seven," which hold significant weight in the S&P 500 index and the Nasdaq, includes: NVIDIA, Apple, Microsoft, Alphabet, Amazon, Meta Platforms, and Tesla.

The report noted, "It is worth mentioning that in recent quarters, the earnings reports of large technology companies like NVIDIA have had a very significant positive or negative impact on the volatility of global stock markets."

The European Central Bank stated that this means that due to their high weight in the S&P 500 index, severe fluctuations in the U.S. technology sector, such as sharp declines, could expose global equity funds to spillover risks due to significant changes in the market capitalization of these tech giants.

The report pointed out, "The significant increase in investor demand has led to additional investments in these companies, while the concentration of the tech giants has expanded significantly, mainly due to the substantial rise in market capitalization and valuation of a few large U.S. technology companies." "In the context of high overall market concentration, potentially excessive valuations, and increased volatility risks, shocks to individual companies or the U.S. technology sector could lead to a sharp decline in U.S. stocks, subsequently causing a significant drop in the returns of global equity funds due to the high allocation to U.S. stocks, followed by widespread profit-taking in domestic stock markets to cover losses in the U.S. stock market, ultimately resulting in large-scale capital outflows from global stock markets, further amplifying and exacerbating negative dynamics in the global market." The European Central Bank serves 20 European countries that use the euro. One of its main responsibilities is to set the interest rates for loans provided to commercial banks in the eurozone to manage the money supply and inflation.

The European Central Bank's report also warns of vulnerabilities in the financial system to cyberattacks and the impacts of climate change.

The report states: "These issues are closely related to climate-related risks in the process of achieving a low-carbon economy (including risks associated with the transition to decarbonization and real-world risks), cybersecurity vulnerabilities (including systemic IT provider disruptions), and the rise of artificial intelligence; at the same time, geopolitical divisions and increasing fragmentation have also led to a regression in global economic, trade, and financial integration."

Finally, uncertainty also stems from the war between Russia and Ukraine, ongoing conflicts in the Middle East, escalating trade tensions with China, and potential new tariffs imposed by the United States