One of three 'salient risks'

The IMF has identified an AI share crash as one of three "salient risks" to world financial stability, alongside rising government borrowing costs and the threat of a big cyber-attack. In its twice-yearly Global Financial Stability Report, the fund highlighted the sky-high valuations for AI companies along with their increasing debt pile as reasons system risks are "elevated".

The IMF called the three risks "plausible near-term catalysts for a sharp tightening of financial conditions and market turmoil".

If an AI correction came, the consequences could be global, the fund said. Aside from the US, Asian markets would be most exposed, while the UK and euro area might be more insulated - though investors with US exposure would still be hit.

Concentrated valuations and leverage

A key source of vulnerability is concentration. The "magnificent seven" US tech stocks - Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla - now account for more than 35% of the S&P 500, up from 12% a decade ago, and their total market capitalisation has risen by more than 50% in the past two years.

The IMF also flagged rising leverage behind the boom:

• •soaring debts contracted by the AI companies themselves
• •hedge fund investment in the sector
• •retail investors borrowing to speculate

Together, these growing sources of leverage heighten the potential for forced selling and surges in equity volatility in an AI-led downturn, according to the report.

Circular financing and hyperscaler doubts

The IMF's warning also rests on doubts about the AI buildout itself. It saw "growing evidence" that AI rollout "may not require investment on the massive scale being undertaken by 'hyperscaler' firms," and that "potential economic gains may not be as large as expected". The hyperscalers are the companies building the underlying infrastructure for the AI rollout, including Amazon Web Services, Google, Meta and Oracle.

Weaker AI investment and profitability could trigger a correction in AI-related asset prices, the fund said - exacerbated by rising leverage, concentrated exposures, and circular financing arrangements. It pointed to "circular financing" deals tying stronger AI companies to weaker partners in the same sector, which could amplify a share price correction.

The report identified $300bn (£227bn) worth of transactions between hyperscalers and "weaker AI firms" in the past three years, supplemented by $650bn in debt, in exchange for $1.4tn in future financial commitments.

The IMF said such a reassessment of AI asset prices would sharply reduce investment, trigger equity market corrections, and tighten financial conditions, with global spillovers.