Concerns about a stock market crash are valid, according to warnings from top financial regulators. Bank of England governor Andrew Bailey, who also chairs the Financial Stability Board, recently addressed G20 leaders in North Carolina about the increasing fragility of the global financial system. His remarks have rekindled fears that soaring equity markets might be on the verge of a correction.
The core issue driving these warnings is debt. Governments worldwide are borrowing at record levels, a trend the Bank of England’s Financial Policy Committee has highlighted since last December. The United States is the most prominent example, with the national debt surpassing $40 trillion this summer. The Trump administration is projecting budget deficits of nearly $2 trillion annually, suggesting the debt load will continue to grow rather than shrink.
This insatiable appetite for borrowing is pressuring bond markets. Governments are competing with private borrowers for credit, driving up the cost of lending. The US Treasury is now paying over 5.2% interest on long-term debt. This rate hike sets the stage for higher interest rates across the economy, affecting mortgages and business loans. The result is a financial environment where the cost of servicing debt is rising, creating pressure on households and businesses alike.
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These trends are visible elsewhere. In the United Kingdom, national debt is approaching £3 trillion. Ireland is facing a similar challenge, with the head of the National Treasury Management Agency stating that the cost of servicing its debt will double by 2030. As debt levels rise toward €250 billion, interest payments are increasing, straining public finances.
A new factor complicates this setting: artificial intelligence hyperscalers. These companies are investing trillions of dollars to deploy new technology, often financing these projects through borrowed money. They are increasingly turning to the private credit market, a sector that lacks regulation and transparency. Estimates of the total size of this shadow debt market range from $1.5 trillion to $3 trillion.
The concern is that these massive investments are driving stock prices to unsustainable levels. AI-linked stocks now account for over 40% of the S&P 500’s total value, a concentration not seen before. They are responsible for over 80% of the index’s gains this year. If the value of these companies were to fall, it could drag down the entire stock market with them.
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Analysts point to several risks that could puncture the AI boom. One factor is a growing local backlash against data centers. Over 75 projects were blocked or delayed in the first three months of this year as communities protest the power and water consumption required by the facilities. Another threat comes from international competition. Chinese AI models are significantly cheaper to run than their American counterparts, potentially offering a viable alternative that could reduce demand for Western technology.
When you combine rising interest rates, high debt levels, and an overvalued tech sector, the financial system becomes vulnerable to shocks. While a crash is not guaranteed, the ingredients for a significant downturn are clearly present in the current economic environment.
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