Bank of England cautions that a debt-financed surge in AI infrastructure spending, potentially reaching trillions, could unravel if stock market valuations stay stretched. The central bank warned that a correction in AI equities could spill over into broader debt markets and has already flagged early warning signs in credit default swaps of companies leveraging debt to fund AI investments.
Currently, much AI investment is funded with cash held by large cloud providers, but the BOE estimates that roughly half of the anticipated $5 trillion in AI spending over the next five years will come from external financing, primarily debt. In its twice-yearly Financial Stability Report, the Bank noted that a sharp drop in stock prices could erode UK household wealth and dampen consumer spending, while also causing losses for lenders exposed to AI-driven capex and pushing up borrowing costs for highly leveraged firms.
This is among the latest warnings about a possible AI bubble, with some observers drawing parallels to the late 1990s dot-com era. As valuations appear to reach potentially irrational levels, companies continue pouring resources into AI infrastructure, including the data centers necessary for advanced AI. The BOE estimates that AI has contributed two-thirds of this year’s gains in the S&P 500, and AI investment fueled about half of US economic growth in the first half of 2025.
The Bank stressed that AI development financing may be at a turning point. It warned that material credit losses in AI lending—whether directly or indirectly—could affect wider credit conditions, including in the UK. The report also highlighted rising corporate debt issuance by AI-specific companies, noting signs such as widening five-year credit default swap spreads for Oracle, which has funded significant AI infrastructure spending despite lower free cash flow margins, contrasting with steadier CDS spreads among broader US investment-grade borrowers.
In short, while AI investment is accelerating rapidly, the BOE warns that financing this growth with debt when valuations are stretched could pose systemic risks if profits, defaults, or borrowing costs deteriorate.”
