Threat of AI stock market crash endangers global financial stability, says IMF | Economy

The threat of an AI stock price crash rippling through global markets endangers global financial stability, the International Monetary Fund has warned.

In its biannual report on global financial stability, the IMF highlighted the sky-high valuations of AI companies as well as their growing debt as one of the reasons why risks in the system are “high”.

“The consequences of fixing AI could be global,” he warns. Aside from the US, Asian markets would be most exposed, and the UK and Eurozone potentially more isolated – although their US-exposed investors would be affected.

An AI crash was one of three “key risks” to stability identified by the IMF, alongside rising government borrowing costs and the threat of a large-scale cyberattack.

He called this trio of factors “plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil.”

The IMF analysis highlighted the interconnected nature of large AI companies and the high levels of borrowing taken out to finance investments in the sector.

“Lower or less sustainable investments and profitability in AI could trigger a correction in AI-related asset prices, exacerbated by increased leverage, concentration of exposures and circular financing arrangements,” he said.

Such a revaluation “would then sharply reduce investment, trigger corrections in stock markets and tighten financial conditions, with global spillovers.”

The “big seven” big tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – account for more than 35% of the S&P 500 stock index in the United States, up from 12% a decade ago, and their total market capitalization has increased by more than 50% in the past two years.

Still, the IMF warned of “increasing evidence” that successful deployment of AI “may not require large-scale investments undertaken by “hyperscaler” companies” and that “the potential economic gains may not be as large as expected.”

Hyperscalers are the companies that build the infrastructure underlying AI deployment, including many large data centers. They include Amazon Web Services, Google, Meta and Oracle.

The IMF also highlighted the growing debt, or borrowing, that underpins the current boom and could amplify the effects of a crash.

In particular, it identified a skyrocketing rise in debts contracted by companies themselves; investment in hedge funds in the sector; and retail investors borrow to speculate on AI stocks.

In the event of an AI-driven market downturn, “these growing sources of leverage increase the potential for forced selling and increased stock volatility,” he said.

He also highlighted the prevalence of “circular financing” deals, linking stronger AI companies to weaker partners in the same sector, and potentially exacerbating the impact of a stock price correction.

It identified $300 billion in deals between hyperscalers and “weaker AI companies” in the last three years alone, supplemented by $650 billion in debt, in exchange for $1.4 billion in future financial commitments.