Following South Korea, Singapore issues AI bubble warning: Tech stock valuations are too high, increasing risk of market correction!

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After the Korea Exchange issued a rare warning to chip giants, Singapore's central bank has also formally issued a caution regarding the frenzy over AI-driven tech stocks.

On Wednesday, the Monetary Authority of Singapore (MAS) explicitly pointed out in its annual Financial Stability Review that certain stock markets, especially the technology and artificial intelligence sectors, are exhibiting "relatively stretched valuations." The regulator warned that if market optimism about AI’s ability to generate future returns reverses, it could trigger a "sharp correction in the broader stock market and further defaults in private credit markets."

This warning comes at a timely moment. Just this Tuesday, following disappointing earnings outlooks from Palantir and AMD, global semiconductor stocks experienced a selloff, wiping out about $500 billion in market value in a short time. This makes MAS’s risk alert particularly specific and urgent.

Notably, this is not an isolated event. Recently, the Korea Exchange also took the rare step of issuing a warning to chipmaker SK Hynix. Boosted by its role as a top supplier of high-bandwidth memory to Nvidia, SK Hynix's stock price surged nearly 240% this year. In response, the Korea Exchange issued an "investment caution notice," which on Tuesday caused SK Hynix’s share price to drop 5.4%, the biggest decline in three weeks.

Valuation/Earnings Disconnect Highlights Bubble Risks

The core concern for Singaporean regulators is to what extent the current tech stock rally is supported by real earnings growth.

The MAS report noted that the current stock market surge is largely driven by AI-related investments, which may lead to excessively concentrated risk exposure in the information technology sector for many investors.

Data supports this concern, showing a clear disconnect between valuations and earnings growth. According to a Bloomberg metric tracking 45 major cloud, semiconductor and hardware companies, their forward P/E ratio is currently around 23 times, significantly higher than 14 times in April. However, in the same period, their earnings forecasts grew by only 13%.

The MAS believes this mismatch shows that much of the stock price increase is due to valuation expansion rather than profit growth.

Aside from valuation bubbles, the business models of some AI companies have also attracted regulator attention. The MAS specifically mentioned that some large tech companies adopt "novel and possibly circular private financing arrangements" to fund expansion.

This financing pattern puts "increasing revenue pressure" on some AI companies, as they must generate sufficient income to repay investors and creditors. If revenue growth falls short of expectations, these companies’ financial positions will face severe tests, which could in turn affect the broader market.

Rare Warnings From Seoul To Singapore: Asia’s Regulators Sound The Alarm

From Seoul to Singapore, regulators' actions indicate growing official concern about overheated markets.

Wallstreetcn wrote that it is seen as "extremely rare" for the Korea Exchange to issue an "investment caution notice" to such a major blue-chip stock as SK Hynix. This mechanism is designed to remind investors to exercise caution when shares experience unexplained, large swings.

Although such warnings do not immediately halt trading, they send a clear signal to the market. In Korea, this serves as a precursor to higher-level warnings (such as restricting margin trading or even suspending trading), signaling that regulators are closely monitoring irrational market exuberance.

Broader Macro Risks

It’s worth noting that the MAS report’s perspective is not limited to tech stocks. The report also highlighted potential risks in other markets. For example, in the sovereign bond market, market concerns over fiscal sustainability are increasing due to high public debt levels.

It also pointed out that recent credit losses in private credit funds indicate rising corporate credit risk.

In addition, MAS stated it would remain vigilant about developments in Singapore’s real estate market and ensure a "stable and sustainable private residential market."

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