UK investors should prepare for the possibility of a sharp correction in the value of UK stocks due to falsely inflated valuations for AI companies, according to the Bank of England.
The latest report from the central bank's Financial Policy Committee, warns that valuations of stocks "appear stretched, particularly for technology companies focused on AI".
This leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic, according to the bank.
The report, which did not mention any companies by name, draws comparisons with the dotcom bubble at the turn of the millennium which saw a sharp drop in the stock price of a host of online and ecommerce companies, including a number of fintechs.
AI companies have become increasingly prominent in the financial services market. Generative AI developer OpenAI recently acquired Roi, a personal finance app, suggesting that AI could make further inroads into the financial advisory market.
Meanwhile some of the largest companies associated with AI have seen their valuations rise significantly in recent months.
The report highlights a number of additional factors that have added uncertainty to the global economy, such as geopoltical tension, fragmentation of global trade and presasure on sovereign bond markets.
"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," states the bank.
"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."