An American flag flies behind a Wall Street sign near the New York Stock Exchange (NYSE) on April 22, 2026 in New York City.
Angela Weiss | AFP | Getty Images
U.S. and European stocks are hitting record highs as investors flock to the AI boom, but economists at the European Central Bank warn that history points to a sharp recession ahead.
“Economic research on past technological revolutions points to the alarming conclusion that current stock market valuations are likely to be revised,” the economists said in a blog post Monday, citing two potential scenarios.
They said a correction could occur because “overconfident and overly optimistic investors” push prices above their fundamental value, leading to a crash when the enthusiasm cools.
But they added that a decline in prices should be expected, even if current valuations accurately reflect AI’s ability to reshape the global economy and boost corporate profits.
Economists have drawn parallels to the 19th century railroad boom, the expansion of electricity and radio in the 1920s, and the rise of the internet in the 1990s, but this isn’t the first time the current wave of AI has been compared to the dot-com bubble of the early 2000s.
In both cases, investor nervousness about the success of the technology-related transition rippled through the economy.
“As adoption spreads…uncertainty spreads across the economy. If something goes wrong with the technology, the entire economy suffers,” the economists wrote.
This has led investors to demand higher risk premiums, and the analysis found that the stock is likely to ultimately fall, even if earnings growth is strong.
“Both views suggest that at some point in the future, there will be a correction following the boom, or a rebound from where valuations rose,” he said, noting that a recovery and further gains in stock prices could follow.
“We don’t know the exact timing in advance. We don’t know the boom and bust patterns until we look at them in hindsight.”
The blog went on to warn of the impact of such a pullback and urged investors to prepare for it.
Economists say the proliferation of “Magnificent Seven” stocks in index funds and pension funds around the world is potentially unknowingly exposing European retail investors to higher risks.
Moreover, there is a risk that a sharp adjustment could cause spillover effects through fund-based structures, ultimately threatening the stability of the euro area, they continued.
“Unlike the dot-com episode, today’s starting point leaves significantly less room to lower interest rates or use fiscal policy to cushion the impact.”
