The IMF's Global Financial Stability Report highlighted sky-high valuations for artificial intelligence companies combined with mounting debt as significant dangers to the financial system. The fund warned that the consequences of an AI correction could spread globally, with Asian markets facing the most exposure. The UK and eurozone could be more insulated, though investors with exposure to US markets would be affected.
The IMF identified three interconnected problems. Big AI companies are highly indebted, with substantial borrowing funding investment in the sector. The seven largest technology stocks now account for more than 35% of the S&P 500 index, up from 12% a decade ago, and their combined market value has grown by more than 50% in two years. The fund warned that successful AI deployment might not require investment on the current massive scale, and economic gains could fall short of expectations.
The report highlighted growing leverage throughout the sector. This includes debt taken on by AI companies themselves, hedge fund investment and retail investors borrowing to speculate in AI stocks. The IMF identified 300 billion dollars worth of transactions between major infrastructure companies and weaker AI firms over three years, accompanied by 650 billion dollars in debt and 1.4 trillion dollars in future financial commitments. A downturn could trigger forced selling and volatile equity markets across the world.