The Bank of England (BoE) has warned that high valuations of artificial intelligence companies remain vulnerable to a “sharper correction”, with a significant reassessment of AI earnings and growth expectations potentially spilling into wider financial markets.

In its latest financial stability assessment, the Financial Policy Committee (FPC) said AI-related stocks had fallen sharply in July as leveraged investors unwound positions, although the sell-off did not spill over into core markets or create broader systemic stress. It said valuations remained high and a further correction could be triggered by concerns over the pace of AI development or adoption.

The central bank also warned of the rapid growth in debt financing for AI investment.

"The rapid increase in AI-related debt issuance broadens the exposure of capital markets to developments in AI," it said. "An increasing volume of AI-related investment is being financed through debt issuance, with global issuance in 2026 expected to exceed that of countries such as the UK."

Morgan Stanley estimated it had reached around $450bn by early September, more than double the total for 2025. The growing use of debt, alongside opacity and “circular arrangements” in some financing structures, could amplify losses if expectations around AI failed to materialise.

The FPC said that a reassessment of expected productivity gains from AI could affect not only AI-related asset valuations but also sovereign debt markets. It also highlighted emerging cyber and operational risks as increasingly autonomous AI models demonstrate the ability to exploit vulnerabilities and access systems beyond their intended tasks.

The committee said the likelihood of interconnected vulnerabilities across sovereign debt, risky asset and credit markets had risen, while geopolitical tensions and higher energy prices had added to uncertainty over global growth and interest rates.

The committee also judged that vulnerabilities in the UK household and corporate sectors were broadly unchanged since the July financial stability report (FSR), despite higher energy prices and borrowing costs placing greater pressure on some households and corporates.

---