'Disorderly correction' to AI-fuelled surge in US stocks could 'spill over' to Irish economy, Central Bank warns

Director of financial stability at the Central Bank, Mark Cassidy, pointed out that gains in US equity markets are increasingly concentrated in just a handful of tech firms

The Central Bank said the stretched valuations seen in global financial markets, as well as continued trade and economic uncertainty, are the main risks facing the financial system in Ireland. Photo: Leah Farrell/Rollingnews.ie

A “disorderly correction” to global equity markets, which are experiencing an AI-fuelled surge particularly in the US, could “spill over to the domestic economy through several channels”, the Central Bank of Ireland has warned.

In its latest Financial Stability Review, the Central Bank said the stretched valuations seen in global financial markets, as well as continued trade and economic uncertainty, are the main risks facing the financial system in Ireland.

Global equity markets have reached record highs largely on the back of tech companies seeing increasing valuations driven by investment in AI technology. However, the scale of investment, particularly in data centres, has raised concerns that the sector might be in a bubble similar to that of the Dotcom bubble of the late 1990s and early 2000s.

In the review, the Central Bank said equity markets continue to rise with “valuations in US technology stocks particularly elevated” while “major equity indices have risen to record levels”, driven by US technology and AI stocks, and “supported by expectations of strong earnings growth”.

“High exposures of US households and foreign investors to US equity markets means that any sharp correction would have far-reaching implications,” the review said.

The bank said a “disorderly correction in global equity markets” could “spill over to the domestic economy through several channels, depending on direct and indirect exposures”.

It noted that while Irish households typically invest fewer financial assets, “a sharp price correction would reduce both household financial wealth with knock-on implications for personal consumption and financial resilience”.

“Widespread risk aversion alongside a correction may also undermine the capacity of Irish-listed firms to attract funding and grow, affecting employment and lender credit risk.” 

Director of financial stability at the Central Bank, Mark Cassidy, said geopolitical and trade policy uncertainty “remain high” and “financial markets do not appear to be pricing in this uncertainty”.

“Stock valuations are near historic highs, and this all raises the risk of sharp market corrections,” he said.

He pointed out that gains in US equity markets are increasingly concentrated in just a handful of tech firms with the top 10 firms on the SNP 500 accounting for almost 45% of its total market capitalization.

Mr Cassidy said while these tech companies expect AI to deliver “higher productivity within the sector and also across the broader economy” there is still “significant uncertainty” over when the benefits will materialise.

In the meantime, these firms are increasingly turning to debt markets to finance AI investment which he said “raises financial stability risks” compared to equity financing.

Another worrying development cited by Mr Cassidy was the equity valuations of non-profitable tech companies have “doubled since April, and that is a pattern that is more reminiscent of the Dotcom bubble”.

The Irish economy

The Irish economy and Irish households are less exposed than other countries to the financial markets. The economy is largely driven by trade and foreign direct investment (FDI) while Irish household wealth is largely tied up in housing assets.

"But while that is important, it's also not to deny that a sharp correction in asset markets would still reduce financial wealth in the economy, will impact on the resilience of households and firms, with knock-on implications also for the real economy through the impact on consumption and investment demand,” Mr Cassidy said.

The Central Bank said while clarity on tariffs have led to a modest improvement in global economic outlook, these improvements rely on the current agreements being maintained and the potential for further trade shocks remains.

In the review, the Central Bank said the Irish economy has “remained strong, but risks from geopolitical and trade uncertainty are significant”.

“Near-term indicators of economic activity are positive, but Central Bank analysis suggests that the domestic economy is likely to be 1% smaller than it otherwise would have been in the medium-term, due to new tariff agreements,” it said.

The global economy

It also noted that the global economic outlook has "improved” following a reduction in trade tensions, but “measures of uncertainty are still well above historical norms”.

“The potential for further trade policy shocks remains… While growth forecasts have improved modestly since the last review, they are still lower than at the start of 2025 and rely on current agreements being maintained.” 

Governor Gabriel Makhlouf said public expenditure plans will continue to need careful management as the Irish economy is particularly exposed to international developments given its structural openness and reliance on US FDI.

Despite significant exposures to global developments, Mr Makhlouf said Irish households, businesses and financial institutions currently have relatively healthy balance sheets.