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The Bank of England (BoE) warned on Wednesday that global financial markets could face trouble ahead if investor appetite for AI sours.

Threadneedle Street said that share price valuations on US stock markets were similar to those seen near the peak of the dotcom bubble on some measures, noting that US government bonds were also vulnerable to any weakening in the Federal Reserve's credibility.

In its quarterly update, the BoE's Financial Policy Committee (FPC) warned of the dangers of an AI-triggered market slump, saying: "The risk of a sharp market correction has increased."

It added: “On a number of measures, equity market valuations appear stretched, particularly for technology companies focused on artificial intelligence.

“This, when combined with increasing concentration within market indices, leaves equity markets particularly exposed should expectations around the impact of AI become less optimistic.”

The BoE highlighted that 30% of the S&P 500's (^GSPC) valuation was made up by the five largest companies, which was the greatest concentration in 50 years.

Share valuations based on past earnings were the most stretched since the dotcom bubble 25 years ago, though looked less so based on investors' expectations for future profits.

“Material bottlenecks to AI progress” including across power, data, or commodity supply chains could also harm valuations, particularly for firms who are expected to benefit from greater AI investment, the FPC said.

It comes as US president Donald Trump has repeatedly urged the Federal Reserve to slash interest rates and sought to remove governor Lisa Cook over allegations she committed mortgage fraud when purchasing a home in 2021.

But the BoE stressed that central bank independence “underpins monetary and financial stability”.

"A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp repricing of US dollar assets, including in US sovereign debt markets, with the potential for increased volatility," it said.

Thirty-year gilt yields hit their highest since 1998 last month and yields for shorter maturities, where most UK borrowing is concentrated, have risen too. The BoE said this increase pointed to concerns about the difficulty reining in high borrowing across advanced economies, amplified by political uncertainty in France and Japan.

The report also found that risk managers remained more confident in the stability of the British financial system than six months ago, and viewed the main dangers coming from cyberattacks and geopolitical factors.

The BoE left its main tools for regulating banks unchanged, and kept the countercyclical capital buffer (CCyB) steady at 2%. After an annual review it left the minimum leverage ratio at 3.25%.