IMF warns an AI share price crash threatens global financial stability

The International Monetary Fund (IMF), which monitors the stability of the global economy and financial system, has warned that a possible fall in the share prices of artificial intelligence (AI) companies could spread across world markets and endanger financial stability. The warning appears in the fund's Global Financial Stability Report, published twice a year; the latest edition came out on 13 October.

The IMF describes risks in the system as "elevated". It cites the very high valuations of AI companies and their growing debt as one reason. "The consequences of an AI correction could be global," the report says. The US and Asian markets would be most exposed, while the UK and the euro area could be somewhat more insulated, although their investors holding US assets would still be hit.

Three main risks

An AI crash is one of three "salient risks" the fund identifies. The other two are rising government borrowing costs and the threat of a large cyber-attack. The IMF calls the three "plausible near-term catalysts" for a sharp tightening of financial conditions and market turmoil.

Concentration and borrowing

The fund says weaker or less durable investment and profitability in AI could trigger a correction in AI-related asset prices, made worse by rising leverage, concentrated exposures and "circular financing" arrangements. Such a reassessment would sharply cut investment, set off equity market corrections and tighten financial conditions worldwide.

The "magnificent seven" tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – make up more than 35% of the US S&P 500 index, compared with 12% a decade ago. Their combined market capitalisation has grown by more than 50% over the past two years.

Yet the IMF points to "growing evidence" that a successful AI rollout may not need the massive investment being made by "hyperscaler" firms, and that potential economic gains may be smaller than expected. Hyperscalers build the underlying infrastructure for AI, including vast datacentres; they include Amazon Web Services, Google, Meta and Oracle.

Rising leverage

The IMF highlights three sources of borrowing: soaring debts taken on by the companies themselves, hedge fund investment in the sector, and retail investors borrowing to speculate on AI stocks. These could lead to forced selling and surges in share price volatility in a downturn.

It also notes "circular financing" deals tying stronger AI companies to weaker partners. Over the past three years, transactions between hyperscalers and "weaker AI firms" have totalled $300bn, supplemented by $650bn in debt, in exchange for $1.4tn in future financial commitments.