Fed Warns of AI Bubble Burst in 2026 Stress Test Scenarios

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.