The Bank of England’s Financial Policy Committee has warned that equity valuations appear stretched, with technology company valuations reaching levels comparable to the dot com bubble, whilst market concentration has hit record highs, leaving investors particularly exposed should expectations around artificial intelligence become less optimistic.
The FPC record from its 2 October meeting states that the earnings yield implied by the Cyclically-Adjusted Price-to-Earnings ratio was close to the lowest level in 25 years, comparable to the peak of the dot-com bubble. The S&P 500 trades at a one-year forward price-to-earnings ratio of 25 times, with some technology companies trading at valuation ratios which imply high future earnings growth.
The market share of the top five members of the S&P 500 has reached nearly 30%, surpassing its previous high of any point in the past 50 years. This concentration means any AI-led price adjustment would have a high pass-through into returns for investors exposed to the aggregate index.
The Committee identified multiple downside risks to current valuations, including disappointing AI capability or adoption progress, increased competition, material bottlenecks from power or data supply chains, and conceptual breakthroughs which change anticipated AI infrastructure requirements. The record states: “Material bottlenecks to AI progress – from power, data, or commodity supply chains – as well as conceptual breakthroughs which change the anticipated AI infrastructure requirements for the development and utilisation of powerful AI models could also harm valuations, including for companies whose revenue expectations are derived from high levels of anticipated AI infrastructure investment.”
Measures of risk premia across many risky asset classes tightened further since the FPC’s June 2025 meeting, with credit spreads remaining compressed despite high levels of uncertainty. Global credit spreads have reached historically low levels whilst leveraged loan spreads remain in the bottom quartile, with the FPC warning the risk of sharp corrections in asset prices remains high.
The Committee noted notable credit defaults since the last meeting involving two US corporates active in the automotive sector. While operating different business models, their financing displayed common factors, including high leverage, weak underwriting standards, opacity, and complex structures, illustrating how corporate defaults could impact bank resilience and credit markets simultaneously.
The FPC identified continued risks from geopolitical tensions, global fragmentation of trade and financial markets, and pressures on sovereign debt markets. In the US, continued commentary about Federal Reserve independence raises concerns, as the record states: “A sudden or significant change in perceptions of Federal Reserve credibility could result in a sharp re-pricing of US dollar assets, including in US sovereign debt markets, with the potential for increased volatility, risk premia, and global spillovers.”
World and advanced economies’ gross debt to GDP ratios increased to 92.3% and 108.5% respectively, in 2024, forecast to peak at 99.6% and 113.3% by 2030. Term premia in sovereign bond markets have increased in many advanced economies, driven partly by higher real interest rates as the outlook for debt issuance remains high, with political uncertainty over fiscal reforms in France and Japan reflected in sovereign debt yields.
Despite global risks, the FPC maintained its judgement that the UK banking system has the capacity to support households and businesses even if economic and financial conditions were substantially worse than expected. The Committee decided to maintain the UK countercyclical capital buffer rate at 2%, with aggregate resilience for major UK banks across capital and liquidity ratios remaining broadly unchanged.
The aggregate household debt-to-income ratio stands at its lowest level since 2001, while aggregate UK corporate debt remains significantly below pandemic peaks. However, the Committee noted UK households and corporates face continued pressure from adjustment to higher debt servicing costs and the cost of living.
The FPC welcomed publication of the Bank’s discussion paper on enhancing resilience of the gilt repo market, seeking views on potential reforms, including greater central clearing and minimum haircuts on non-centrally cleared transactions.
