Bank of England warns AI tech rally may see sudden drop
In its October 2025 report, the Bank of England (BoE) warned that high AI tech stock valuations could trigger a sudden correction.
The Bank of England published findings from its Financial Policy Committee (FPC) meeting held on October 2, discussing UK financial stability. The committee said that stock prices, especially in AI-focused sectors, appear overvalued and could drop sharply given their concentration in a few U.S. tech firms.
The market share of the top 5 members of the S&P 500, at close to 30%, was higher than at any point in the past 50 years,the Bank said.
These statistics raise downside risks if optimism around AI fades. The FPC is also concerned that valuation measures based on past earnings are nearing levels last seen at the dot-com peak, though forward-looking metrics are less extreme. Shared AI models, a few key providers, and algorithmic trading could cause linked moves and increase stress in market downturns. The FPC will refine monitoring of AI risks through enhanced surveys, supervisory intelligence, and participation in its AI Consortium.
Bank of England's October 2 FPC report. Source: bankofengland.co.uk
The Bank noted recent defaults in U.S. auto credit markets, saying high leverage and weak underwriting in complex financial structures indicate potential risks.
Uncertainty around the global risk environment increases the risk that markets have not fully priced in possible adverse outcomes, and a sudden correction could occur should any of these risks crystallise. The Bank added: a sharp correction could interact with vulnerabilities in the system of market-based finance, adversely affecting the cost and availability of finance for households and businesses.
At its October 2 meeting, the FPC maintained the UK countercyclical capital buffer (CCyB) rate at 2%, an extra amount of capital banks must hold during good times to help absorb losses in tougher economic periods. The FPC called the banking system resilient, saying UK banks are capable of supporting households and businesses even if economic or financial conditions deteriorate significantly. Its next meeting is set for November 25, with the report to be published on December 2.
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