A correction in the US stock market would mean domestic economic activity contracting by as much as 3.25 per cent compared to current forecasts, the Department of Finance has said, amid growing fears of an artificial intelligence-fuelled bubble in equity markets there.
The big US share indices have been on a tear in recent years, as companies spend billions of dollars on artificial intelligence (AI) infrastructure such as data centres and chips. Yet that has given way to pessimism over the summer, amid fears the AI boom may not be sustainable for the long term.
The largely tech-focused Nasdaq Index is down 4 per cent over the past month while the wider S&P 500 is almost unchanged over the same time period. That compares to big gains over the previous 12 months.
The big US tech firms have a huge presence in Ireland, with wage growth in the information and communications technology sector here far outstripping the wider economy. That has led to worries that a drop-off in that sector will have a disproportionate impact on this country.
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The department’s research takes as its central scenario the potential impact of US stocks falling 10 per cent before slowly recovering.
“The results suggest that a US equity correction would be associated with a broad-based but temporary weakening in Irish activity,” said the department. “Modified domestic demand [MDD] is estimated to be around 1.5 per cent lower than baseline after one year, driven mainly by modified investment. Private consumption declines more modestly. The results are consistent with employment growth being 0.7 percentage points weaker over the first year following the shock than it otherwise would have been,” it added.
In a so-called severe scenario where share prices fall 20 per cent, MDD would drop off by as much as 3.25 per cent. Modified domestic demand is widely considered a more relevant measure of the Irish economy as it excludes multinationals shifting intellectual property through this State.
Still, the report makes clear that the scenarios are focused only on the impact of stock markets tumbling. They do not take into account the potential wider economic impact of what a bursting AI bubble might do to the US and global economy in general that would have consequential effects on this State.
“Given the AI boom’s growing reliance on debt, a disorderly correction could tighten financing conditions and amplify the impact beyond what is estimated here,” it said.
“A correction in equity prices implying a fall in profitability of firms in the sector could lead to a slowing in growth – or indeed a decline – in employment in the sector.
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“The impact on the public finances could be significant,” it warned.
“A reduction in employment in the [IT] sector would lead to a proportionately greater impact on income tax revenues. Corporate taxes would also be negatively affected as a result of lower profitability.
“Additionally, a stock market correction could have indirect impacts on the Irish economy, via its impact on the global economy, and specifically, external demand in the US economy.
“Weaker consumer confidence and tighter domestic financial conditions could also weigh on household spending and on investment outside the multinational sector,” it added.
This story was updated on July 23rd, 2026 to correct the expected drop in MDD versus baseline under the severe scenario to 3.25 per cent.
