ECB Study: US Tech Stocks May Correct Even If AI Meets Expectations, Threatening the Eurozone

Economists at the European Central Bank warn that a correction in US tech stocks is not only possible but should be viewed as an expected outcome—this risk persists even if artificial intelligence ultimately fulfills all investor expectations.

In a post on the ECB’s official blog on Monday, ECB researchers Malin Andersson, Stefano Corradin, and others presented two complementary lines of reasoning: First, as AI permeates the economy, risk will spread from individual companies to the broader economy; investors will demand higher risk premiums, and unless profit growth is sufficient to offset this, stock prices will face downward pressure; second, overly optimistic investors have pushed valuations above fundamentals, and once sentiment reverses, the correction could be more severe.

This warning has direct implications for financial stability in the eurozone. The researchers pointed out that eurozone households hold approximately €440 billion in exposure to US tech stocks, while insurance companies and pension funds also hold significant positions in the "Magnificent Seven" tech giants. The researchers wrote, "Shocks to the US AI market will not stop at the US border," and if a stock market crash coincides with "broader market turmoil," it would pose a "threat to financial stability" in the eurozone.

Correction Logic: Stock Prices May Fall Even If AI Succeeds

The core argument of the ECB researchers is that the inherent structural contradictions in tech stock valuations make a correction difficult to avoid, even in a rational scenario.

The researchers explained that in the early stages of AI development, stocks of pioneers like Nvidia had significant "option value"—investors bet on the huge potential gains from technological breakthroughs, driving price-to-earnings ratios sharply higher. However, once the technology succeeds and spreads throughout the economy, uncertainty shifts from the individual company level to the macroeconomic level.

"If any problems subsequently arise with this technology, the entire economy will be impacted," the researchers wrote. Unlike risks associated with individual companies, systemic uncertainty at the economic level "cannot be hedged through diversification," so investors will demand higher returns to compensate for the risk they bear. This rise in risk premiums will exert downward pressure on stock valuations—meaning stock prices may ultimately fall even if AI itself proves successful.

Historical Perspective: Technological Revolutions and Boom-Bust Cycles

ECB researchers compared the current AI investment boom to several historical technology-driven investment frenzies, including the railway boom of the 19th century, the expansion of electricity and radio in the 1920s, and the Dotcom Bubble at the turn of the century.

"In each case, truly transformative technologies attracted substantial investment, causing the stock valuations of adopting companies to surge before falling sharply," the researchers wrote.

The researchers also noted that overconfident and overly optimistic investors push prices above fundamentals, and "when overconfidence fades, the decline in prices may be more severe than in a rational scenario." However, they added that this does not mean prices cannot continue to rise after a correction. "If AI proves sufficiently transformative, future valuations could still be far higher than current levels, even after a correction."

Notably, the Nasdaq-100 index, dominated by tech stocks, experienced selling last month but has since rebounded to near historic highs.

Eurozone Exposure: Diverse Transmission Channels, Limited Policy Space

Although recent gains in tech stocks have been concentrated mainly in the US market, the actual risk exposure of eurozone investors should not be underestimated.

Eurozone households primarily hold approximately €440 billion in US tech stocks through global index funds, while insurance companies and pension funds also hold large positions in the "Magnificent Seven" tech giants such as Apple, Alphabet, and Microsoft. The researchers pointed out that US and eurozone stock markets have historically been highly correlated, and the impact of a US stock market decline could further transmit to the eurozone through market sentiment, credit conditions, and the labor market.

The researchers also warned that compared to the period when the Dotcom Bubble burst, policymakers currently have "significantly less room to respond to market turmoil"—interest rate levels are lower, and there is less fiscal policy flexibility.

"The smaller size and relatively lower valuations of the eurozone's tech sector reduce the risk of a spontaneous domestic market crash," the researchers stated, "but this is not reassuring: households, insurance companies, and pension funds hold significant exposure through global index funds, and pressure on the US stock market has historically affected eurozone stock markets as well."