The ECB warns about high AI valuations and sovereign debt risks

The rising market optimism around Artificial Intelligence and alarming levels of public debt could pose a risk to the financial stability of the eurozone, warned the European Central Bank (ECB).

"Financial markets, particularly stock markets, remain vulnerable to sharp adjustments due to persistently high valuations," stated the ECB in its periodic review of financial stability for the single currency bloc.

"Market confidence could change abruptly, not only if growth prospects deteriorate, but also if profits in the technology sector, especially those of companies related to Artificial Intelligence, fail to meet expectations."

U.S. stock markets have reached successive new all-time highs, recovering from the sharp drop recorded in April, after U.S. President Donald Trump announced more severe tariffs, which were later partially withdrawn.

However, gains have mainly concentrated in technology companies such as AI chip designer Nvidia, raising fears of an enthusiasm-fueled bubble that could burst.

In a conference call with journalists, ECB Vice President Luis de Guindos said there was a risk of an "accident," although companies' stronger fundamentals meant the current situation was not directly comparable to the dot-com bubble of the 1990s.

"Valuations are very high by historical standards," he stated. "The possibility of an accident will be there."

High levels of public debt could further undermine financial stability, according to the ECB, which warned this could cause fluctuations in the euro's value and in the cost of eurozone public debt.

Market concerns around "strained public finances could create tensions in global bond markets," the ECB stated.

"At the same time, fiscal fundamentals in some eurozone countries have been persistently weak. Fiscal deviation could test investor confidence."