Federal Reserve Vice Chair for Supervision Michelle Bowman has warned that US stock markets could face a significant correction if companies investing heavily in artificial intelligence (AI) fail to generate the returns investors currently expect.
Speaking at the Council on Foreign Relations in Washington on November 10, Bowman identified growing financial-market risks linked to the rapid expansion of AI infrastructure, including data centres, advanced computing equipment and AI model development.
She cautioned that disappointing returns from AI investments could trigger a substantial decline in equity valuations, increase borrowing costs and weaken consumer spending. She also highlighted the possibility of rising private long-term interest rates, which could put additional pressure on housing and small-business investment.
Her remarks come as technology companies continue committing substantial capital to AI infrastructure, while investors increasingly question whether future revenues and productivity gains will justify the scale of spending.
Bowman Warns AI Investment Boom Could Trigger Stock Market Correction
In her November 10 speech, titled The U.S. Economy and Considerations for Monetary Policy, Bowman said one of the risks to economic activity was a large correction in equity valuations if returns on AI investments fell short of expectations.
She also warned that a sharp increase in private long-term interest rates could create additional pressure across financial markets.
According to Bowman, falling equity prices could undermine the resilience of consumer spending, while higher borrowing costs could further strain interest-rate-sensitive parts of the economy, particularly housing and small-business investment.
Her comments describe a potential risk scenario rather than a prediction that a market crash is imminent.
Bowman said she would continue monitoring developments in credit and equity markets to assess potential threats to economic growth and financial stability.
AI Companies Are Increasingly Relying on Debt to Finance Expansion
One of Bowman’s major concerns is the growing amount of debt and other financial commitments associated with the AI infrastructure boom.
Technology companies are investing heavily in data centres, semiconductors, advanced computing systems and energy infrastructure to support the development and deployment of AI services.
However, the Federal Reserve official noted that revenue generated by AI services has not yet been sufficient to cover the costs of maintaining existing models and developing new ones, alongside the expansion of data-centre infrastructure.
As investment requirements have increased, hyperscalers and other technology companies have increasingly turned to external financing, including corporate bonds, private credit and project finance.
Bowman said AI-related debt was on track to exceed $800 billion during 2026.
She also highlighted the growth of financial commitments that do not necessarily appear as conventional debt on company balance sheets. These include long-term leases, contractual obligations and residual-value guarantees.
According to her remarks, potential payments associated with these commitments are estimated to be more than three times the amount of AI-related debt.
This creates additional exposure for lenders and investors if the companies using the financing cannot generate sufficient revenue from their AI operations.
Fed Official Raises Concerns About Circular Financing in AI Industry
Bowman also highlighted complex financial relationships between large technology companies and smaller businesses involved in AI development.
Some major technology companies and chip designers are investing in smaller AI firms that subsequently purchase their products and services.
At the same time, large technology companies have reportedly assumed off-balance-sheet liabilities that allow smaller companies to use their credit strength as collateral for financing data-centre construction and computing equipment.
Bowman said these connections create the appearance of circular financing.
Such arrangements could become a source of risk if AI demand weakens or revenues fail to meet expectations. A slowdown in spending by smaller AI companies could affect their suppliers, lenders and larger technology partners.
The Federal Reserve official also warned that the complexity of these financing structures makes it difficult to assess counterparty risks across the financial system.
Although major banks, insurers, pension funds and investment firms have exposure to AI-related financing, Bowman noted that many of these institutions remain well-capitalised and have stable funding.
AI Investment Is Supporting US Economic Growth
Despite her concerns, Bowman acknowledged that AI investment has become an important contributor to US economic growth.
She said US economic growth gained momentum during 2026, supported by strong investment demand and resilient consumer spending.
Real GDP increased at an annualised rate of approximately 2.4% during the first half of the year, while Bowman estimated that third-quarter growth likely exceeded 3%.
AI-related capital expenditure has played a significant role in the expansion of business investment.
High-tech equipment, software and data-centre construction accounted for the large majority of growth in business investment since 2025, according to her speech.
AI adoption has also expanded across the economy. Bowman cited estimates indicating that approximately 25% of businesses and around 10% of workers reported using AI daily in their work.
She expects increased AI adoption to improve productivity over time and potentially reduce inflationary pressure as businesses become more efficient.
However, she cautioned that the economic benefits may take time to materialise as companies and workers identify the most effective applications of the technology.
AI Infrastructure Costs Could Create Additional Inflation Pressure
The rapid expansion of AI infrastructure is also affecting prices across several technology-related industries.
Bowman said demand for data centres has increased demand for memory chips, semiconductors, computers and other electronic products.
In some categories, prices have risen by double-digit percentages this year as demand has outpaced available supply.
She expects production capacity to gradually catch up with demand, but warned that AI-related supply pressures could continue influencing inflation in the near term.
Bowman estimated that core personal consumption expenditures (PCE) inflation, the Federal Reserve’s preferred underlying inflation measure, likely reached 3.3% in October.
She attributed above-target inflation to several factors, including tariffs, energy prices and demand associated with AI investment.
Her outlook is that inflation could move closer to the Fed’s 2% target next year as some of these pressures ease. However, she stressed that inflation has remained more persistent than previously expected.
Higher Interest Rates Could Put More Pressure on the Economy
Bowman’s warning about AI-related financial risks comes as the Federal Reserve continues to assess the appropriate direction of monetary policy.
She supported the Federal Open Market Committee’s decision to keep the federal funds rate unchanged at its October meeting, saying policymakers needed more information about economic conditions and the effects of previous rate decisions.
However, she said inflation pressures were persisting while labour-market conditions had improved.
Bowman also noted that financial conditions had tightened recently because of lower equity prices, higher private interest rates and a stronger US dollar.
Rising borrowing costs could create additional challenges for businesses that depend on external financing to expand their AI infrastructure.
At the same time, a sharp decline in technology stock valuations could reduce household wealth and weaken consumer spending.
Bowman said the benefits of further monetary policy tightening would need to be carefully weighed against the costs for interest-rate-sensitive sectors of the economy.
She did not present her comments as a commitment to a particular interest-rate decision.
What a Correction in AI Stocks Could Mean for Investors
A sharp correction in AI-related stocks could affect more than technology companies.
Large technology firms, semiconductor manufacturers, data-centre operators and companies providing AI infrastructure are increasingly connected through investment, financing and supply agreements.
If AI revenues fall short of expectations, companies could reduce capital expenditure, delay infrastructure projects or face higher financing costs.
Such developments could affect suppliers, lenders and investors across several industries.
For investors, Bowman’s comments highlight the importance of examining whether AI companies can convert their large capital investments into sustainable revenue, profits and productivity improvements.
Strong demand for AI technology does not automatically guarantee that every company investing in the sector will generate attractive financial returns.
The long-term economic benefits of AI may remain significant, but the financial markets could experience volatility if valuations and financing commitments move ahead of actual business performance.
Bottom Line
Federal Reserve Vice Chair Michelle Bowman has warned that US equities could face a sharp correction if returns from AI investments fail to meet market expectations.
She also highlighted growing AI-related debt, complex financing arrangements and potential risks from circular investment relationships between large technology companies and smaller AI businesses.
While Bowman recognises that AI investment is supporting economic growth and could improve productivity over time, she believes the scale of financing and market expectations creates risks for financial stability.
Her warning does not mean a stock market crash is inevitable. Instead, it underscores the importance of sustainable AI revenues, responsible financing and realistic expectations as companies continue expanding their AI infrastructure.
Disclaimer: This article is for informational purposes only and does not constitute investment or financial advice. Bowman’s comments describe potential economic and financial risks, not a prediction of an imminent stock market crash.
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