Central Bank: Increased Volatility in US Stocks Reflects Growing Concerns Over AI Profitability

The Central Bank stated today that since November of last year, volatility in the US stock market has intensified, reflecting growing market concerns over the future profitability of the AI industry. Currently, the concentration of the S&P 500 index has reached a historic high, with the 'Magnificent Seven' tech giants accounting for 33% of the weight. If corporate expected earnings cannot support current high valuations, it could trigger a sharp reversal in investor sentiment, leading to a significant risk of stock price correction.

The Central Bank further pointed out that a 'circular trading' model exists within the AI supply chain, where suppliers, customers, shareholders, and financing sources are intertwined, forming a highly connected structure. This increases the difficulty for institutional and individual investors to evaluate the equity structure and true market value of AI companies, potentially adding to latent systemic risks.

The Central Bank released its 20th Financial Stability Report today, summarizing domestic and international economic and financial developments from early last year to April of this year, and analyzing risks affecting Taiwan's financial system.

The Central Bank noted that the global economy grew steadily last year, inflation rates declined, and overall financial conditions eased. Looking ahead to next year, influenced by geopolitical risks such as the war in the Middle East, changes in US trade policy, and the monetary policy paths of major central banks, global economic uncertainty is increasing, which may slow economic growth, revive inflationary pressures, and exacerbate financial market volatility.

The report states that while the Taiwan stock market has performed strongly, considering structural characteristics such as high correlation with foreign capital flows, concentration in the technology industry, and the rapid expansion of the ETF market, coupled with uncertainties in US tariff policies, rising geopolitical risks, and significant short-term gains and a sharp increase in margin trading balances in the Taiwan stock market, all these factors may increase index volatility and correction pressure. It is advisable to carefully monitor changes in market risks.

When asked by the media about the Central Bank's view on the recent concentration of funds in the stock market, Huang Bao-xia, Deputy Director of the Financial Examination Department, stated that the stock market reflects investors' outlook for the future, and based on optimistic expectations, investors are participating in the stock market more actively.

Regarding recent media reports discussing the 'four-loan family' topic—exploring how to enter the market simultaneously through mortgages, car loans, personal loans, and stock margin financing—Huang reminded that the margin trading balance for listed companies is indeed on an upward trend. Upward and downward corrections in the stock market are normal operations of the capital market. If volatility and correction pressure increase in the future, investors must be more cautious in their asset-liability management. The Central Bank will also continue to closely monitor the scale of financing in the securities market and the lending situation of banks and securities firms.

The report also mentioned that since November last year, US stock volatility has intensified, reflecting market concerns over AI industry profitability. Currently, the S&P 500 concentration is at a historic high, with IT-related stocks accounting for over 35%, and the 'Magnificent Seven' accounting for 33%. If expected earnings cannot support current high valuations, it could trigger a sharp reversal in investor sentiment, leading to a significant risk of stock price correction.

The report added that to support the massive capital needs for AI infrastructure investment, AI manufacturers often adopt 'off-balance-sheet financing' strategies, converting high one-time capital expenditures into installment-based operating expenses. For example, by establishing a Special Purpose Vehicle (SPV) in partnership with a private credit fund, the SPV builds the data center, and the AI manufacturer pays long-term rent to use the data center services. However, the transparency of SPV information disclosure is relatively limited, making it difficult for investors to grasp the actual debt risks borne by AI manufacturers.

Huang explained that the AI investment boom supports global economic development and drives active stock markets in various countries. However, general investors may not be aware of the actual investment situation in the AI supply chain, and she reminded them to be more cautious and rational when investing.

Regarding the stability of various financial institutions, the Central Bank explained that Taiwan's banking profits continued to hit new highs last year, with good asset quality and adequate capital levels. Life insurance companies saw declines in both profits and capital adequacy ratios and face higher market risks. Bills finance companies saw significant profit growth and adequate capital, but liquidity risk remains high. Domestic major payment systems are operating smoothly. Overall, Taiwan's financial system remains stable.

The Central Bank stated that future uncertainties such as international geopolitical conflicts, US trade policy developments, monetary policy adjustment paths of major economies, weak domestic demand and overcapacity issues in China, and climate change risks may affect global economic development and financial stability, and bring risks to Taiwan's financial system. The bank will take appropriate measures in a timely manner to promote domestic financial stability.

The US 'Magnificent Seven' tech giants include Apple, NVIDIA, Microsoft, Amazon, Tesla, Google's parent company Alphabet, and Facebook's parent company Meta.