Stock markets in the United States and Europe have been hitting record highs this year. Much of that rise has been driven by excitement over artificial intelligence.
But economists at the European Central Bank say history suggests a correction is coming. They shared their view in a blog post published this week.
The economists described the situation as worrisome. They said past technology booms tend to follow a similar pattern. Prices rise sharply, then fall back down.
Why A Pullback Could Happen Anyway
The ECB team laid out two possible reasons for a future drop in prices. The first is that investors become too optimistic and push prices higher than they should be.
In that case, a crash happens once that optimism fades. This is the scenario most people picture when they think of a stock market bubble.
The second reason is more surprising. The economists said a correction could happen even if current prices are a fair reflection of what AI will do for company profits and the economy.
That is because investors tend to demand a higher reward for taking on risk once a technology becomes central to the wider economy. As more industries rely on that technology, any problems with it can hurt everyone, not just tech companies.
This growing sense of risk causes investors to ask for bigger returns to keep holding stocks. Over time, that pushes prices down, even if company earnings stay strong.
The ECB pointed to three past examples of this pattern. These were the railway boom of the 1800s, the spread of electricity and radio in the 1920s, and the rise of the internet in the 1990s.
In each case, growing doubts about the technology spread beyond the companies directly involved. The wider economy felt the effects too.
What This Means For Investors
The economists said the exact timing of any correction cannot be predicted in advance. These patterns are usually only clear after they have already happened.
They also warned that European retail investors carry a lot of exposure to this risk. This is because Magnificent Seven stocks make up a large share of many global index funds and pension funds.
Many people may not realize how much of their retirement savings depend on the performance of a small group of technology companies.
The blog also raised concerns about knock on effects. A sharp drop in stock prices could create problems for fund based investment structures.
That kind of stress could eventually threaten financial stability across the euro area, according to the economists.
They also compared today's situation to the dotcom crash of the early 2000s. Back then, central banks and governments had more room to respond with lower interest rates or increased spending.
The economists said that room is smaller today. Interest rates are already at different levels than they were during the dotcom era, and government budgets face more constraints.
They ended their analysis by saying a boom followed by a correction could later be followed by a new recovery and further gains. But they stressed that the drop itself is the part investors should prepare for now.
