Weekly Market Commentary

A reality check for the AI trade

AI-related stocks came under sharp pressure last week as investors became more cautious about the scale and financing of investment in AI infrastructure. The Philadelphia Semiconductor Index fell -11.4% over the week, while the technology-heavy Nasdaq declined -4.5%. Concerns ranged from growing competition in the semiconductor industry to the debt being used to finance data centres and other AI infrastructure. However, the weakness was far from universal. The equal-weighted US equity index gained +0.5% and European equities also advanced, suggesting that the sell-off was concentrated largely within areas most closely associated with the AI investment boom.

Inflation complicates the picture

Investors also had to contend with renewed inflation concerns. US consumer prices rose more strongly than expected in September, while producer prices and retail sales later in the week also surprised to the upside. Higher energy costs added to the ongoing pressure, with Brent crude ending the week at nearly $110 a barrel. The combination of resilient economic activity and persistent inflation briefly increased expectations that the US Federal Reserve may need to raise interest rates again. Yet government bond yields ultimately fell over the week as investors became increasingly concerned about the effect that already-tight financial conditions could have on economic growth.

The bar is getting higher

Last week’s volatility does not necessarily undermine the longer-term investment case for AI, but it does suggest investors are becoming more discerning. After the strong performance of AI-related companies, simply spending heavily may no longer be enough. Increasing attention is likely to be paid to which companies can translate that investment into sustainable earnings and cash flows, particularly when higher interest rates make debt-funded expansion more expensive. Meanwhile, renewed political unrest in France provides another reminder that investors are navigating risks beyond the technology sector, with the demonstrations adding to an already challenging fiscal backdrop ahead of difficult budget negotiations. France’s government is targeting
€54 billion of fiscal adjustment in its 2027 budget.

The week ahead

The health of the global economy will remain in focus this week, with preliminary October purchasing managers’ indices (PMIs) due on Friday providing an early indication of business activity across major economies. Closer to home, investors will be watching UK inflation and labour-market data. The US earnings season also broadens out, with technology companies including Netflix, Meta and Tesla due to report. Following last week’s volatility, investors are likely to pay particular attention to what companies say about AI investment, how that spending is being financed and, importantly, the returns it is beginning to generate.