Stock prices tied to artificial intelligence companies might be climbing partly because investors are scared of missing the rally. But financial experts say now’s not the time to bail out.
The European Central Bank put out its Financial Stability Review on Wednesday. The report shows worldwide stock markets sitting at consistently high levels. There’s a catch though, a small group of connected American technology giants now dominate the market. That concentration creates conditions where prices could suddenly drop.
These dominant players, often called hyperscalers, include Nvidia, Alphabet, Microsoft, and Meta.
Current stock prices don’t seem to account for the ongoing risks and uncertain conditions in the market, according to the review.
Investors might be feeling hopeful that worst-case scenarios won’t happen. But these price movements could also show people are afraid of missing out on further gains, especially since markets have held up well despite recent problems.
Strategists see real value despite FOMO behavior
Market analysts have noticed this fear of missing out behavior. Still, they believe genuine value exists in certain AI investments.
Julien Lafargue is chief market strategist at Barclays Private Bank and Wealth Management. He pointed out that the ECB’s review aims to highlight possible threats to financial stability, even when the chances of these threats actually happening are small.
Prices aren’t cheap, he told CNBC, but companies are showing real growth. Lafargue stressed the need to look carefully at different sectors. The real danger? Companies whose stock prices have jumped without producing any actual earnings yet. He specifically mentioned quantum computing companies.
In these situations, investor decisions seem based more on hope than real results, he noted.
While fear of missing out might push some prices higher, others reflect genuine earnings growth. That makes careful selection crucial, Lafargue added.
Turbulent weeks follow Nvidia earnings
The ECB report comes after several turbulent weeks for international stocks. Nvidia’s earnings announcement initially lifted the broader market, which had been under pressure from complex deal structures, debt offerings, and high prices. The technology company’s shares first jumped after the announcement but then quickly reversed course.
Investors can’t agree on whether an AI-driven investment bubble exists. One investor even claims there’s an “everything bubble.” Ray Dalio, who founded Bridgewater Associates, voiced worries. Larry Fink from BlackRock questioned whether massive spending on AI infrastructure is necessary. Cathie Wood from Ark Invest dismissed bubble talk altogether.
The ECB joins other central banks calling for caution. The Bank of England and International Monetary Fund issued similar warnings earlier.
The European central bank stopped short of declaring a bubble but drew comparisons to the dot-com boom and collapse. Current high prices appear supported by unusually strong earnings results, it added.
Luis de Guindos, vice president of the ECB, wrote in the report that market attitudes could change quickly. This could happen if growth expectations worsen or if technology company earnings, particularly those from artificial intelligence firms, don’t meet expectations.
Non-bank financial organizations in the euro area would probably suffer losses under such conditions because of their heavy investments in American companies, he mentioned. Mismatches in liquidity for open-ended investment funds, high borrowing levels among hedge funds, and lack of transparency in private markets could make market stress worse, De Guindos added.
Magnificent 7 dominate but raise concerns
The “Magnificent 7” stocks – Alphabet, Amazon, Apple, Tesla, Meta, Microsoft, and Nvidia – have risen 24% so far this year. As reported by Cryptopolitan. Cryptocurrency markets have shown instability, with a major selloff this month hitting Bitcoin and Ethereum particularly hard.
Michael Field is chief equity strategist at Morningstar. He said the ECB makes a valid point. The Magnificent 7 represents 40% of the Morningstar US index. That’s dangerous concentration. All seven companies have significant AI connections, adding another risk layer.
Morningstar sees potential gains in most of these major companies, though. Tesla stands out as more than 50% overvalued, Field stated.
Other AI-linked stocks have stretched valuations too. British favorite ARM Holdings trades at almost 90 times projected 2026 earnings, double Nvidia’s multiple. That’s certainly a risk, he acknowledged.
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This articles is written by : Nermeen Nabil Khear Abdelmalak
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