Fear of missing out may be fueling AI rally, says ECB

AI-related equity valuations may be driven by fear of missing out, known as FOMO — but now’s not the time to get cold feet, according to strategists.

Global equities are at persistent highs, the European Central Bank said in its Financial Stability Review on Wednesday. At the same time, concentration among a small group of interconnected U.S. hyperscalers has also intensified, making the market vulnerable to sharp adjustments, it warned.  

Hyperscalers typically refer to AI-related technology names such as Nvidia, Alphabet, Microsoft and Meta.

“Current market pricing does not appear to reflect persistently elevated vulnerabilities and uncertainties,” the review said.

Investors may be driven by “optimism that tail risks will not materialise,” but moves could also “reflect fears of missing out on a continued rally, as markets have proved to be resilient to recent shocks,” it added. 

Strategists noted some FOMO in the market but believe there is still real value in some AI plays.

The ECB’s review is designed to highlight potential risks to financial stability, Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management pointed out, “even if the probability of those risks materialising is low.”

Valuations are “not cheap” but companies are delivering on growth, he told CNBC, calling for differentiation across specific sectors. The bigger risk lies with companies benefitting from an increased share price when they have not yet generated earnings, Lafargue said, pointing to quantum computing-related companies.

“In these cases, investor positioning seems driven more by optimism than by tangible results,” he said.

“In short, while some valuations may be driven by ‘FOMO’ others are backed by extraordinary earnings growth and, as such, differentiation is key,” he added.

The ECB’s review follows a rollercoaster few weeks for global stocks amid Nvidia earnings, which buoyed an otherwise deflating equities market that had been pressured by circular dealmaking, debt issuances and high valuations. The earnings initially sent the tech giant’s stock soaring but then quickly reversed.  

The market is spilt on whether there is an AI-fueled investment bubble, with one investor going so far to say that there is an ‘everything bubble.’ Bridgewater Associates founder Ray Dalio expressed concern, Blackrock’s Larry Fink pushed back on the need for large checks to be cut for AI infrastructure, and Ark Invest’s Cathie Wood rejected the idea of a bubble.

In contrast, the ECB is the latest in a string of central backs to urge caution, with earlier warnings coming from the Bank of England and International Monetary Fund.

The European central bank did not weigh in on whether it thinks a bubble has emerged but noted parallels with…