Theme of the Day: AI 'exuberance' risks ending in lengthy investment bust, BIS warns

Big Tech's AI spending spree risks ending in a prolonged "investment bust" that could rattle financial markets and damage the global economy, the Bank for International Settlements (BIS) has warned. The BIS said the prospect of worse than expected returns in the tech sector could prompt investors to rapidly curb financing for AI companies, at a time when the five biggest "hyperscalers" are expected to invest more than $1tn from 2025 to the end of 2026. Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions, the BIS said in its annual economic report, as it laid out the risks of the current AI exuberance. The warning comes amid mounting concerns over the scale of equity and debt issuance fuelling the AI revolution and the turbulence this is creating in global markets. To date, optimism about AI has provided an important tailwind to global growth, the BIS added. The report acknowledged it was possible that AI could raise productivity "significantly" over the coming decade, given the efficiency gains it can provide to companies. Growth held up well in 2025, despite significant headwinds from higher tariffs and geopolitical uncertainty. Three factors stand out. First, the drag from higher trade barriers was lessened by effective tariff rates that were lower than initially anticipated, trade diversion and firms' willingness to absorb costs through lower margins. Second, a wave of optimism about AI spurred a surge in capital expenditure on AI infrastructure, lifting investment in the US with spillovers along global supply chains. Third, animal spirits about AI lifted stock valuations, sustaining favourable global financial conditions. But it said that historical episodes of investment booms provide "instructive parallels", among them the expansion of canals in the 1830s, railways in Britain in the 1840s and the dotcom boom of the late 1990s. These all had one key feature in common, said the BIS: "a genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify". It added: these episodes ended with an eventual reversal in investment, inducing economy-wide recessions. A major equity market correction associated with AI could have broader implications today than in the past, the BIS added, because households have greater exposure to shares relative to their wealth and income. Financial stability could also be endangered, given the volumes of debt being sold by AI companies to finance their investment, it warned. While the global economy has demonstrated surprising resilience despite shocks including the US-Iran war, the economic repercussions of the near-closure of the Strait of Hormuz trade chokepoint have not fully run their course given continuing energy disruption, the BIS warned. Prior to the war, about a fifth of the world's oil and liquefied natural gas supplies were shipped through the waterway. Despite these challenges, financial markets have remained buoyant, reflecting expectations that the disruptions would be short-lived and the AI boom would continue. The inflationary impacts are already being felt and could prove persistent, the BIS said. Perils have grown with pressure points around risks of persistent inflation, the sustainability of AI-related investments, growing financial vulnerabilities and weakening fiscal positions, it added.