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Central BanksMedium•25 February 2026•

1 min read

Fed Warns of AI Bubble Burst in 2026 Stress Test Scenarios

Two men, Jerome Powell and another, in suits, with Federal Reserve building, US flag, gold, coins, and financial charts.

Key Facts

1The Fed's 2026 severely adverse scenario includes a 54% fall in the stock market.

2The Fed identifies an AI bubble burst as a potential trigger for an abrupt decline in risk appetite.

The Federal Reserve has unveiled its 2026 stress test scenarios, highlighting the potential burst of an AI bubble as a primary risk to financial stability. Under a severely adverse scenario, the central bank models a massive 54% decline in the stock market triggered by an abrupt shift in risk appetite. The Fed identifies AI-driven valuations as a potential catalyst for this downturn, signaling institutional caution regarding current market exuberance. Even in the baseline scenario, equity growth is projected at a modest 4.3% annually through 2029, barely outperforming T-bill returns. These models are designed to test the resilience of the financial system against global stagflation and extreme market volatility. The inclusion of these specific triggers underscores growing concerns over the sustainability of gains in major tech instruments like NVDA and MSFT.