By Jules Rimmer
BIS warns that unjustifiable valuations in the equity market raise risks everywhere
The Bank for International Settlements is often referred to as the central bank of central banks. It's owned by 63 countries representing 95% of global GDP
The Bank for International Settlements, often referred to as the "central bank for central banks," is worried about equity-market valuations. Its latest report highlights the economic vulnerabilities created when technology stock prices imply growth that they may struggle to deliver.
The yearly report from the BIS was published Sunday during the annual general meeting held at its headquarters in Basel, Switzerland.
For a body known for its conservatism, the warnings it contained were stark: "A major equity market correction could have larger economic consequences today than in the past." The report states financial stability could be at risk, AI-sector financing compounds these vulnerabilities and there is a direct transfer mechanism from equity market volatility to credit markets that could "trigger a more widespread credit market crunch.
Ground zero for the BIS reservations are those earnings-growth expectations.
Stocks are pricing ambitiousearnings growth expectations
"Implied (growth) rates exceed the elevated growth that technology firms have delivered in their relatively short lifetimes. Sustaining such high growth could become increasingly challenging." BIS notes that "sentiment has also been a major driver of valuations" and a "post-pandemic exuberance" has generated an air of complacency among investors."
Worse still, any significant correction would have wider repercussions than in the past owing to the rapid growth of household equity exposures in the last two decades. Any pullback in stock markets has major negative wealth effects, and because the U.S. is pretty much two thirds of the world's stock market capitalization a "U.S.-led repricing could propagate globally."
What happens in stocks won't stay in stocks, though, the report predicts. It points to fixed-income markets as an obvious vulnerability, given the huge debt issuance of hyperscalers, AI laboratories and engineering, procurement and construction contractors. Any slowdown in capex deployment would have a severely detrimental impact on revenue and debt servicing for these borrowers.
AI firms' investments areincreasingly financed by debt
The risks here are heightened, according to the BIS, by what it calls the "opacity of AI-sector financing." This refers to the complex web of private arrangements, of which perhaps the most obvious example is circular financing whereby chip makers or hyperscalers take stakes in AI labs or cloud companies who then commit to multi-year purchases of chips or computing power. Disclosure on these deals, and many of the risks associated with them, is often less than fully transparent.
A repricing of tech equity risk would, in all likelihood, prompt a rerating of corporate credit risk and tighter credit conditions, owing to the heavy issuance by this sector in recent years. The BIS report warns that a corporate credit freeze has the potential to be as disruptive as the global financial crisis of 2008 or the dash-for-cash crisis of March 2020. A knock-on effect of this would be a deterioration of the problems already ongoing in the private-credit space, wherein many investor redemption requests could not be fulfilled owing to liquidity constraints.
That many corporates operating in the AI sector have relied so much on private credit to fund growth in the last few years also present concentration risks. Lending to this sector now accounts for about 15% of portfolios generally and so any material slowdown in the sector's growth prospects could have a disproportionate impact on credit markets.
The Nasdaq 100 QQQ has gained 15% this year, with a leading semiconductor ETF SMH up 70% in 2026.
-Jules Rimmer
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.