ECB Vice President Sounds the "Bubble Alarm": AI Asset Valuations Are "Very High," Stock Markets Are Highly Vulnerable to a Pullback

European Central Bank Vice President Boris Vujcic warned that soaring market valuations, driven largely by the artificial intelligence boom, have left stock markets more vulnerable to a pullback. "Such price-to-earnings ratios, forward price-to-earnings ratios, even if not unprecedented, have not been seen for a long time," the Croatian official said in the ECB podcast *Euro Matters* released on Tuesday. "These valuations may ultimately prove justified, but they may not." He warned that "exposures are large and growing," adding: "We must be very careful and monitor this situation closely, because with exposures this large and so much investment flowing in, this will certainly pose a risk to the repricing of stock markets." **A "Chorus" of Central Bank Governors** Vujcic's remarks further reinforce a growing consensus among central bank governors, regulators and investors: the valuations of major AI companies may be excessive, and a sudden decline in these companies' valuations could trigger a broader global market pullback. Just a day earlier, ECB President Christine Lagarde said on Monday that asset valuations in the AI industry are "very high" and a pullback is "entirely possible" though no one can predict the timing. This is not an isolated statement within the ECB. According to reports, an analysis published on August 17 by five ECB economists (Malin Andersson, Johannes Breckenfelder, Stefano Corradin, Kalin Nikolov and Maria Antonietta Viola) already concluded: "A correction in current stock market valuations is possible," and for the euro area, this would be "a financial stability issue, not merely a private one" in other words, the shock would not be borne by tech stock investors alone. **The Timing of the Warning Is Noteworthy** These comments come as AI developers such as Anthropic PBC and OpenAI are clashing with U.S. President Donald Trump's administration over their calls for the entire industry to slow down AI development. This stance has already triggered a selloff in tech stocks and raised questions about whether the global data center construction boom can be sustained. In fact, overnight U.S. stocks provided a direct illustration. At Monday's close, all three major U.S. stock indices fell. But the real epicenter was the semiconductor sector the Philadelphia Semiconductor Index plunged 5.86% in a single day, its largest drop since July 1. The same night, the U.S. 10-year Treasury yield broke through 5% intraday for the first time since October 2023. Moreover, after a brief tariff scare in 2025, U.S. stock margin debt surged 77% in 14 months to more than $1.5 trillion, and is now facing a triple shock of "historic-level valuations, rising risk-free rates, and an AI slowdown." **Just How Extreme Are the Valuations?** Supporting Vujcic's "rare in years" assessment is a set of valuation data worthy of the history books. According to industry information platform NextFin, the S&P 500's Shiller Cyclically Adjusted Price-to-Earnings ratio (Shiller CAPE) has remained above 40 since May 2026 the only time in history it sustained above that level for several consecutive months was just before the peak of the dot-com bubble in March 2000. The current reading is in the low 40s, approaching the historical record of 44.2, and about 2.3 times the long-term average of 17. The breadth of overheating valuations goes beyond the P/E ratio. The "Buffett Indicator," which compares total U.S. stock market capitalization to GDP, has climbed above 237%, far exceeding the 200% "playing with fire" warning line set by Buffett himself. Since the current bull market began in October 2022, the S&P 500 has risen 127%, the Dow 95%, and the Nasdaq 161%, with gains driven mainly by AI infrastructure spending. The rally has also shown rare, extreme concentration: the Magnificent Seven (Apple, Microsoft, Nvidia, Google, Amazon, Meta, Tesla) account for more than 35% of the S&P 500's market capitalization; the top ten companies in the index account for about 38% of market cap, while their earnings account for only 31% (according to NextFin, as of early 2026). This concentration means that a stumble by a handful of stocks would become a whole-market event rather than a manageable sector rotation. For Europe, the exposure is real. According to the analysis by the aforementioned team of ECB economists, euro area households hold about 440 billion in the top seven U.S. stocks by market capitalization, with pension and insurance funds' exposure at a comparable scale and a considerable portion of this forms "involuntary" concentrated holdings through passive index instruments. **What's Different This Time: Thinner Buffers** Compared with the bursting of the dot-com bubble in 2000, the most critical difference may not lie in the bubble itself, but in the ammunition available to cushion the fall. In 2000, the Federal Reserve had ample room to cut rates, and the government could step in to support. But the analysis notes that today's starting point leaves significantly less policy space interest rates are already low, and public debt is already high. If a pullback coincides with broader market instability, policymakers will find it difficult to calm things easily which is precisely the core logic behind the ECB elevating this to a "financial stability issue." In the podcast, Vujcic also listed geopolitical risks and fiscal policy as two potential dangers to the financial system. The former "can quickly change prices and market attitudes," while on the latter, some countries have "fiscal positions that are unsustainable in the long run." "We have learned from past experience that what is unsustainable is unsustainable," he said, and addressing these problems sooner is better than later. "This is also an aspect we must monitor very closely, because these markets can also be repriced, and repriced relatively quickly." Geopolitical risks are not unfounded: Brent crude has already topped $107 a barrel on Monday, and the Middle East conflict's disruption to inflation and bond markets is adding a second layer of pressure to valuation repricing. On the rate side, the CME FedWatch tool shows the market is pricing in close to a 90% probability that the Fed will raise rates by 25 basis points in September; Macro Risk Advisors even warned in analysis that a rate hike potentially starting this week could trigger a roughly 10% pullback in the S&P 500. **The Central Bank's Restraint: A Warning Is Not Absolute Bearishness** It is worth noting that the ECB has maintained considerable restraint while issuing its warning. According to reports, its analysis explicitly states that it is not predicting a crash, and that the timing of a pullback is "unknowable in advance" and can only be confirmed after the fact; moreover and this is equally important for investors eager to sell off "this does not mean current prices are the ceiling." If AI is truly transformative, even after a reset, valuations could still be "much higher" in the future. In other words, what the ECB is trying to disentangle is the pair of questions wrongly bound together by this long and narrow rally: "AI's success" and "the safety of current stock prices." AI's technological substance is one thing; the price investors pay for it is another and it is the latter that Vujcic and his colleagues are truly worried about.