With U.S. and European stocks rising close to record highs on the back of the artificial intelligence boom, European Central Bank economists warned that current stock prices are likely to face a correction.

On Aug. 18, CNBC reported that ECB economists said in a blog published that day that a sharp pullback could follow the AI-related rally, based on the course of past technology revolutions. They wrote that research into earlier technology revolutions points to a worrying conclusion and that a correction in current stock market valuations is likely.

The ECB economists described two scenarios for a correction. The first is investor overheating. They said overly confident and optimistic investors could push stock prices above companies' fundamental values, with a sharp drop following once expectations falter.

The second is a case where forecasts are correct that AI can reshape the global economy and lift corporate profits. Even then, they said it would be difficult to avoid a stock price decline. As the spread of technology widens, uncertainty spreads from individual companies to the broader economy, and investors then demand higher compensation for risk. The ECB economists said, "As the adoption of technology spreads, uncertainty spreads across the overall economy," and that if problems occur, "the whole economy is hit." They said such demands for risk compensation are likely to pull down stock prices even if profit growth remains solid.

Past examples cited included the 19th-century railway boom, the spread of electricity and radio in the 1920s, and the spread of the internet in the 1990s. These technologies initially created strong growth expectations, but as investor anxiety grew they shared a common feature of delivering a shock beyond the technology sector to the broader real economy. Comparisons of the AI boom to the dot-com bubble in the early 2000s are also not new.

The ECB economists said both scenarios could ultimately lead to a "post-boom correction." They said a pullback from current levels could occur at some point, whether valuations rose on excessive optimism or growth forecasts prove valid. They added that a recovery and further gains could follow after a correction and did not deny the cycle of rises and falls itself. They added, "The exact timing cannot be known in advance," and, "These boom-bust patterns are usually identifiable only after the fact."

The blog warned about the impact such a pullback could bring and urged investors to prepare. It said European retail investors may be heavily exposed to an AI-related stock correction without realizing it because of the high weighting of the so-called Magnificent 7 in global index funds and pension funds.

It also warned that if a sharp correction triggers knock-on effects through a fund-based structure, it could ultimately threaten financial stability in the euro zone. The ECB economists said, "Unlike during the dot-com period, there is far less room now to absorb shocks through rate cuts or fiscal policy."