Bailey warns AI may not ‘live up’ to market hype

Bank of England governor Andrew Bailey has cautioned that artificial intelligence (AI) might not meet the high expectations set by investors, potentially causing a sharp decline in AI-related stock valuations. In a speech delivered in Zurich, Bailey stated that it could take longer than previously anticipated for investors to see the benefits of their heavy investments in AI. His comments come at a time when trillions of dollars have been wiped from company valuations in the most recent week.

Bailey's speech focused on the potential threat AI poses to financial stability, warning that there's a risk investors may have overestimated the value of AI. He acknowledged that historical trends with "General Purpose Technology" innovations, such as Edison's electricity, suggest that the timeframe for realizing returns may not align with market expectations. Bailey further noted that financial markets often overvalue uncertain future returns, which is crucial for investor risk-taking.

He echoed a previous warning that "everyone is priced to be a winner" in AI stock pricing, despite historical evidence suggesting that such predictions are unlikely. Using the dotcom bubble and the subsequent failure of Netscape as an example, Bailey drew parallels between past and present AI stock market scenarios. He pointed out that a recent mass sell-off in AI-related stocks, following the US mid-term elections defeat of President Trump, has fueled speculation about an impending AI bubble burst.

In the past week, the US stock market experienced a massive loss of more than £2.4 trillion. However, by Monday, the New York Stock Exchange and Nasdaq saw a slight recovery in stock prices, with both indices rising by more than two percent. Nvidia, a major player in the AI industry, saw its stock price drop by five percent after an investigation into CEO Jensen Huang's alleged affair with a Chinese spy.

Bailey's warning about market pricing adds to the growing concern over the unrealistic expectations that major US tech companies must post substantial profits over the next two years, following massive investments in AI infrastructure. According to JP Morgan, these hyperscalers, including Amazon and Meta, are expected to spend approximately $900 billion on AI-related projects in 2026 alone.

Earlier this year, Bank deputy governor Sarah Breeden had also predicted that stock markets would face an adjustment and potentially fall due to the overvaluation of AI stocks.