The Bank of England is warning that fast-rising prices of big technology and AI companies could fall sharply.
It says some stock markets now look very stretched, which means share prices are high compared to company profits and past trends. If prices drop, it could hit pensions, ISAs, and other long-term savings.
The Bank is also making it easier for High Street banks to lend, and it sees other risks building in the global economy.
What is an AI bubble?
An “AI bubble” is when investors push up the prices of companies linked to artificial intelligence much faster than their real earnings or long-term value.
Prices keep rising because people expect big future gains, not because the current profits justify it. If those hopes fade, prices can fall very quickly.
The Bank of England says valuations for some AI-focused firms look very high and could be vulnerable to a “sharp correction”, which means a sudden drop in prices.
What the Bank of England is seeing in markets
In its latest financial stability report, the Bank of England says:
- UK share prices are close to the most stretched levels seen since the 2008 global financial crisis.
- US stock market valuations look similar to conditions before the early 2000s dotcom crash.
- The most stretched valuations are among companies heavily linked to AI.
The Bank says a lot of the expected growth in AI over the next five years will be funded with debt. That means many companies and investors are borrowing large sums to pay for AI projects, data centers, and chips.
Industry estimates suggest spending on AI infrastructure could reach around $5 trillion. The Bank says much of this will come from the AI firms themselves, but about half may come from outside lenders, mostly in the form of debt.
The Bank warns that if AI-related shares fall sharply:
- Loans to AI firms could turn bad.
- Losses could spread to banks and other lenders.
- This could create wider financial stability risks.
It says deeper links between AI companies and credit markets make any correction more dangerous for the financial system.
How this compares to the dotcom bubble
The Bank of England compares what is happening now with the dotcom boom of the late 1990s. Back then:
- Investors rushed into early internet companies.
- Stock prices soared on excitement about new technology.
- Many firms had little or no profit.
- The bubble burst in 2000, and prices crashed.
- Some companies went out of business and people lost jobs and savings.
Today, AI and big tech stocks play a similar role in markets. There is huge interest in companies such as Nvidia, Google, and other AI-linked firms.
Bank of England governor Andrew Bailey says there are differences this time. He notes that many of the large US tech firms now have positive cash flows and are not “created on hope” alone.
However, he also points out that:
- The US AI sector is very concentrated. A small group of companies makes up a large share of total market value.
- Not every company will “win” in AI, and not all will gain equally.
- A shift in market views, such as concerns over competition between big tech firms, can move prices quickly.
The International Monetary Fund and the OECD have also warned about the risk of sharp price drops in AI and tech stocks. Jamie Dimon, head of JP Morgan, has said he is “far more worried than others” about a serious market correction in the coming years.
Why this matters for everyday savers and investors
A big fall in AI or tech stocks would not only affect traders. It could also hit:
- Workplace and private pensions
- Stocks and shares ISAs
- Index funds and ETFs that track major stock markets
- Investment funds that hold large positions in big tech
When stock prices fall, the value of these savings can drop too. That can affect retirement plans, long-term goals, and how much income people can expect in later life.
The Bank of England also highlights that:
- A market correction can reduce the value of pension funds that hold shares.
- A drop in market value can affect anyone whose savings are linked to stocks, even if they do not choose individual shares themselves.
At the same time, the UK chancellor Rachel Reeves has used the Budget to encourage more investing in stocks by changing ISA rules to favor shares over cash. That means more people may end up with exposure to market swings.
Changes to bank capital rules
Alongside its AI warning, the Bank of England has proposed a change that affects how much capital UK banks must hold as a safety buffer.
Banks are required to keep a certain amount of high-quality capital, known as Tier 1 capital. This capital is there to absorb losses if loans go bad.
The Bank plans to:
- Cut the Tier 1 capital benchmark from 14% to 13%.
- Keep a buffer of around £60 billion above minimum requirements.
According to the Bank, this should still leave UK banks strong enough to handle a severe downturn, including:
- Unemployment doubling
- A sharp fall in house prices
- The economy shrinking by about 5%
The Bank says the lower requirement should make it easier for lenders to offer loans to households and businesses. The change is expected to take effect in 2027.
Impact on mortgages and monthly budgets
The financial stability report also looks at what higher interest rates mean for homeowners.
The Bank of England says:
- People coming off fixed-rate mortgages in the next two years face an average increase of about £64 a month in repayments.
- That is roughly an 8% rise in monthly mortgage bills for a typical owner-occupier moving from a fixed rate.
- Around 3.9 million borrowers, or 43% of UK mortgage holders, are expected to refinance at higher rates by 2028.
However, not everyone will pay more. The Bank notes that about one-third of borrowers who refinance over this period will see their payments fall, as rates have dropped from their peak in 2022.
The Bank of England base rate, which strongly influences mortgage costs, has fallen from 5.25% in 2024 to about 4%. That is still higher than the very low rates seen for much of the past decade, but lower than the recent peak.
Other global risks the Bank is watching
The Bank of England says overall risks to financial stability have risen during 2025. It points to several concerns:
- Geopolitical tensions between major countries
- Trade conflicts that could disrupt global supply chains
- Higher borrowing costs for governments
- The risk of cyber-attacks on financial institutions and key services
The Bank warns that rising tensions increase the chance of cyber-attacks and other disruptions that could affect markets and payments.
Key takeaways for savers and investors
For people with pensions, ISAs, and other investments, the Bank of England’s message can be summed up in a few points:
- AI-related stocks are very popular and prices look stretched in some cases.
- There is a real risk of a sharp correction, especially if expectations for AI profits are not met.
- A drop in tech and AI shares would affect pension funds, index funds, and ISAs that hold these stocks.
- Banks are still judged strong enough to handle a severe shock, even with slightly lower capital requirements.
- Higher interest rates are still feeding through to mortgages, but some borrowers will see relief as rates fall from their 2022 spike.
- Geopolitical tensions and cyber risks are adding extra pressure to the global financial system.
For everyday investors, the main message is caution. AI may well be a powerful technology that supports long-term growth, but rapid price rises can reverse. Anyone with money in the stock market, even through pensions or simple index funds, is exposed when bubbles form and then burst.
