GoKawiilThe American flag flies behind a Wall Street sign near the New York Stock Exchange (NYSE) in New York City on April 22, 2026. Angela Weiss | Afp | Getty Images
U.S. and European stocks are scaling record highs as investors pile into the AI boom, but economists at the European Central Bank warn that history points to a sharp downturn ahead. "Economic research on past technological revolutions points to a worrisome conclusion: a correction of current stock market valuations is likely," the economists wrote in a Monday blog, citing two potential scenarios. A correction could occur because "overconfident, overoptimistic investors" push prices up beyond their fundamental worth, leading to a crash when that exuberance fades, they said. But a fall in prices should be expected, even if current valuations are an accurate reflection of AI's capacity to reshape the global economy and boost corporate profits, they add.
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The economists cite parallels with the 19th century railway boom, the expansion of electricity and radio in the 1920s, and the rise of the internet in the 1990s — not the first time the current AI wave has been compared to the dotcom bubble of the early 2000s. In each case, investor nerves about the success of a technology-linked transition spilled over into the wider economy. "As adoption spreads...uncertainty becomes economy-wide. If something then goes wrong with that technology, the whole economy suffers," the economists wrote. This drives investors to demand a higher risk premium, which their analysis found is likely to eventually drive stock prices down, even if profit growth remains robust. "Both views imply a boom followed by a correction, or a pullback from wherever valuations have risen, at some point in the future," they said, noting that this could in turn be followed by a recovery and further climb in stocks. "The exact timing is unknowable in advance. These boom-bust patterns are only identifiable with hindsight."
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