The current landscape of rising interest rates may not lead to significant systemic financial issues, but investors should remain cautious about the ongoing fervor in the US stock market, particularly driven by Artificial Intelligence advancements.

Paul Dales, Capital Economics' chief UK economist, recently shared insights indicating it's premature to dismiss the potential impacts of increased rates on the financial system. However, he noted a decreasing likelihood of a major financial crisis.

For more than ten years after the financial crisis, interest rates hovered around zero as a strategy by global policymakers to revitalize the economy. This period of exceptionally low rates, some economists argue, encouraged risky investments in financial markets, which are now becoming evident as interest rates climb.

So far, financial markets have seen isolated instances of instability, such as the LDI crisis in the UK and Silicon Valley Bank's downfall, but these have not escalated to systemic problems.

Dales commended policymakers for their adept handling of the transition towards higher interest rates. The general consensus among economists is that interest rates are unlikely to return to the ultra-low levels seen post-financial crisis. Dales sees this as beneficial for financial stability, as it reduces the impetus for investors to engage in risky ventures for higher yields.

Low-interest rates typically lure investors into riskier ventures in pursuit of greater returns. On the other hand, higher rates are expected to curb significant imbalances in credit-dependent sectors like real estate.

However, Dales indicated that higher rates might not sufficiently curb speculative activities in other areas.

He pinpointed the burgeoning excitement over Artificial Intelligence as a potential concern, suggesting that it might be fueling a bubble in the US stock market. This surge is exemplified by the Nasdaq index's approximately 45% jump last year, largely propelled by major tech stocks, and the S&P 500's 25% increase in 2023.

Dales warned that the next major financial downturn might resemble the dotcom crash of the early 2000s more than the late-2000s housing crash or Global Financial Crisis (GFC).

Echoing Dales' sentiments, Jonathan Hall, a member of the Bank of England’s Financial Policy Committee, highlighted "exuberance" as a significant risk to the financial system. He cautioned that low volatility could lead to a false sense of security, encouraging excessive risk-taking.