The European Central Bank (ECB) has raised alarms about the increasing reliance of the stock market, particularly in the United States, on a small group of companies benefiting from the AI boom, which could indicate an asset price bubble.

This concentration of large firms poses risks of significant global spillovers if their earnings expectations are not met, potentially leading to financial instability.

As part of its Financial Stability Review, the ECB aims to assess risks to the eurozone's financial system and offer recommendations to address structural vulnerabilities.

The ECB noted that the likelihood of abrupt shifts in market sentiment is increasing, driven by factors such as poor economic growth, changes in monetary policy, and geopolitical tensions.

Valuations and risk premiums are at risk of shifting due to changes in investor risk appetite, according to the ECB.

The ECB highlighted that euro area governments, especially in Italy and France, will face higher borrowing costs over the next decade, necessitating careful fiscal management to ensure economic stability.

Additional weaknesses in the financial system were identified, including geopolitical uncertainties, climate-related risks, and cybersecurity threats.

The ECB expressed concerns about the euro area's vulnerability to trade fragmentation, particularly in light of recent U.S. political developments that could lead to increased tariffs.

Increased market volatility could trigger forced asset sales by euro area investment funds, exacerbating stress in corporate bond markets.

The ECB cautioned that low liquid asset holdings and liquidity mismatches in some investment funds could lead to cash shortages, resulting in forced asset sales and further price declines.

While the rise of AI has driven up valuations, the ECB warns that markets may be sensitive to sudden changes in investor sentiment, raising the risk of revaluation shocks.

This situation is particularly concerning given the dominance of the 'Magnificent 7'—a group of major companies including Alphabet, Apple, and Microsoft—that are leading the AI boom.