Risk of disconnection from economic fundamentals in stock markets

Risks detached from economic fundamentals, such as increasing concentration in stock markets, the artificial intelligence bubble, the situation of private credit institutions, and high debt burdens, threaten the global financial system.

Increasing Concentration in the Market

Intense interest in tech giants is increasing market concentration to dangerous levels. According to a Morgan Stanley report, just 10 stocks account for 33 percent of the US market value.

While this concentration is even more pronounced in international stock exchanges, it creates a massive snowball effect through mutual funds and ETFs.

Artificial Intelligence Bubble and Paranoia

Just like the housing bubble in the past, it is argued today that artificial intelligence will fundamentally change the world and that traditional valuation models are invalid.

The pricing of artificial intelligence-related companies based on the assumption of a flawless future represents a serious disconnect from rapidly deteriorating economic fundamentals.

Private Credit Institutions and Risks

While the artificial intelligence boom is largely financed by private credit institutions, these structures are not subject to regulations as strict as those for banks.

Liquidity mismatches and high market volatility pose a two-way threat to financial institutions in terms of declining asset values.

Historical Debt Burden and Activities

The fact that the US is under a historically high debt burden, alongside high inflation and volatility, puts pressure on the fiscal system.

While total public debt is approaching 39 trillion dollars, the share of net interest payments in GDP is increasing rapidly.

Global Vulnerabilities

Approximately 80 percent of the countries in the world are in the position of oil importers, and many countries heavily accumulated debt in the post-Covid period.

In developing countries, interest payments consume a significant portion of tax revenues, while fiscal flexibility is progressively diminishing.

Conditions for Market Correction

For financial markets to avoid sharp corrections, the war must end and artificial intelligence must produce the expected results.

History shows that the larger the divergence between the real economy and financial markets, the more severe the correction will be.