BOE Warns AI Valuations Stretched Despite Productivity Hopes

The Bank of England (BOE) Governor Andrew Bailey said Thursday that artificial intelligence is beginning to deliver on its economic potential, citing early signs of productivity improvements from AI adoption. Bailey noted that conversations with business leaders reveal increasing stories of AI-driven efficiencies, though he cautioned that the sector's valuations remain "stretched" according to data. His comments follow recent data showing AI contributing to nearly half of the first-half GDP growth in the U.S. and two-thirds of the S&P 500's performance in 2025 according to reports.

The BOE Governor emphasized that AI could be the next major productivity boost for the UK, which has struggled with stagnant growth amid the waning effects of the internet and computing revolutions according to recent analysis. Bailey cited a recent example from a telecommunications executive who highlighted substantial cost savings attributed to AI according to internal reports. However, he warned that while AI's potential is significant, current market valuations may be overblown and could face corrections according to financial analysts.

Analysts and investors have closely watched the unfolding AI story, particularly with major U.S. defense and government contracts fueling growth for companies like C3 AI. The firm recently secured a contract with the U.S. Army to deploy an AI-driven logistics system, which will support real-time forecasting for parts, fuel, and munitions. The deal, led by the Army's Rapid Capabilities and Critical Technologies Office (RCCTO), aims to enhance combat readiness and operational tempo in high-stakes environments according to government sources.

C3 AI's solution will integrate into the Brigade Command & Control network, enabling faster resupply to forward-deployed units. The company will leverage its existing C3 AI Contested Logistics and Readiness applications, both of which are already in use by the Defense Logistics Agency and U.S. Air Force. CEO Stephen Ehikian underscored the contract as a validation of the firm's ability to deliver enterprise-scale AI systems to meet the military's evolving needs.

The federal government remains a key growth driver for C3 AI, with its latest federal contracts contributing to a 45% share of total bookings. The company has expanded its footprint across agencies such as the Department of Health and Human Services, the U.S. Intelligence Community, and the Marine Corps, among others according to company filings. These partnerships align with the administration's push toward commercial AI solutions, as agencies phase out custom systems in favor of scalable, off-the-shelf technologies.

Despite the strong federal traction, C3 AI's stock has underperformed the broader tech sector in recent months. Shares of AI fell 0.6% over the past three months, lagging behind the Zacks Computers - IT Services industry's 5.7% decline. The company has faced headwinds from a government shutdown, weaker sales trends, and high deployment costs, all of which have pressured margins and growth expectations.

The AI arms race in the defense sector is intensifying, with competitors like Palantir Technologies and BigBear.ai vying for dominance. BigBear.ai, for instance, recently announced a strategic acquisition of Ask Sage, a FedRAMP-high certified AI platform supporting over 100,000 government users. The acquisition positions BigBear.ai to expand its edge-ready AI capabilities and target classified environments according to company statements. Meanwhile, Palantir continues to maintain a strong presence in high-classification military and intelligence operations, setting a high bar for new entrants according to defense analysts.

As AI adoption accelerates across both public and private sectors, investors are keenly watching how companies navigate execution challenges and valuation risks. C3 AI's recent Q3 earnings call featured questions from analysts about the durability of its federal growth and management's accountability framework for execution improvements. CEO Ehikian emphasized structural incentives tied to operational goals and weekly performance tracking as key tools for maintaining progress according to earnings materials.

For investors, the intersection of AI, defense, and government procurement offers both opportunities and risks. The structural advantages of closed-end funds (CEFs) have made them an attractive option for managing volatility and capturing income during market dislocations. CEFs trade at discounts to their net asset values (NAVs), offering a margin of safety and the potential for mean reversion during market declines. High distribution yields and strategic use of leverage also position CEFs to benefit from a shifting rate environment according to financial experts.

In the current low-rate climate, CEFs are likely to see improved distribution coverage and net asset values as borrowing costs fall. This dynamic is particularly relevant for funds with long-duration assets, which tend to appreciate as interest rates decline. The combination of these factors could position CEFs like BlackRock Global Opportunities Equity Trust (BOE) as compelling additions to income-focused portfolios according to market analysis.

With AI's potential to drive productivity and economic growth gaining more traction, the challenge for investors remains balancing optimism with caution. While early adopters like C3 AI and BigBear.ai show promise, the long-term economic and market impacts of AI will depend on execution, scalability, and the alignment of public and private-sector strategies. For now, the BOE's cautious optimism reflects a broader market sentiment that AI is transitioning from hype to impact - but not without hurdles along the way.