Central Bank officials warned on Monday that there could be a knock-on effect to the Irish economy in the event of a stock market shock, as valuations of US technology stocks show signs of being “stretched”.
A valuation model developed by Nobel laureate Robert Shiller puts stocks in the US S&P 500 index as trading at about 40 times earnings, adjusted for inflation – the second-highest level ever, trailing only the dot-com peak in 2000.
Mark Cassidy, director of financial stability at the Central Bank, noted that the 10 largest US companies – including Amazon, Meta, Apple and Nvidia – have accounted for 45 per cent of gains of the wider S&P 500 since April, as the market has surged to all-time highs – despite high levels of macroeconomic uncertainty. Most of the tech groups have major operations and are significant employers in Ireland.
Irish business grandee Gary McGann on working with Michael Smurfit, the fall of Anglo Irish and the current state of the Irish economy
This week on Inside Business host Ciarán Hancock is joined in studio by Gary McGann, a grandee of Irish business whose many roles included being chief executive of drinks group Gilbeys, Aer Lingus and packaging group Smurfit. Born and raised in Dublin, Gary actually began his career in the civil service, with the Comptroller & Auditor General. He studied at night to become an accountant and later moved into the private sector, rising up the ranks and moving around to eventually become CEO of Smurfit in 2002.He has also had a busy career as a non-executive director, including roles with Anglo Irish Bank at the time of its collapse, and with bakery goods group Arytza, at a challenging time for that business. We covered a lot of ground in this interview. You’ll hear Gary talk about his childhood, his time in school and a couple of false starts in university. We also take a deep dive into his business careers, the highs and the lows. And he gives Ciarán his perspective on the current state of the Irish economy, and what we could be doing better. Along with some tips for young business leaders starting out in their careers. Produced by John Casey with JJ Vernon on sound.
However, Cassidy said at the launch of the authority’s second financial stability review of the year that the domestic Irish economy faces greater direct exposure to international tariffs on trade.
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“Both would impact directly upon Ireland. But it is a trade and FDI (foreign direct investment) shock, anything further in relation to tariffs, [that] would affect us most directly here,” Mr Cassidy said. “We are somewhat less exposed directly to financial market shocks, but inevitably they would also spill over.”
The pricing of artificial intelligence-related (AI) stocks is reliant on ongoing favourable projections for earnings growth, the report said. A substantial shift in investor risk appetite, major negative developments in the business models of AI-related companies, or a series of correlated macroeconomic or financial shocks could lead to a significant market correction, it warned.
The International Monetary Fund, Bank of England, and members of the European Central Bank governing council have warned in the past month about market valuation risks, while the heads of Wall Street beasts Goldman Sachs and Morgan Stanley have predicted that equities could fall 10-20 per cent.
The Central Bank report also warned that market interest rates attached to corporate bonds are also at multiyear lows, relative to low-risk sovereign bonds, and “appear disconnected from the uncertain macroeconomic and geopolitical environment”.
It noted that the bankruptcies in recent months of US car-loan specialist Tricolor Holdings and car-parts supplier First Brands Group are “warning signs” have led to heightened concerns over lending standards in the international private credit market.
When asked about the potential impact on the European economy from US tariffs, Central Bank governor Gabriel Makhlouf indicated that he was more concerned about tariffs and trade barriers on the EU single market.
A landmark report on EU competitiveness last year, written by former ECB president Mario Draghi, found that Europe’s existing internal barriers act as a de facto 44 per cent tariff on average goods and a 100 per cent tariff for services.
“We should be spending less time worrying about tariffs from the United States and thinking more about the tariffs that are effectively imposed within the single market,” Mr Makhlouf said, adding that more time should be spent trying to dismantle the internal EU obstacles.
