It is a startling spectacle for those of us who remember the late 1990s. The tech-heavy NASDAQ has shed 12% over the past fortnight. London’s AIM-listed artificial intelligence darlings have fared even worse. At the coalface of market commentary, the chatter is not about innovation. It is about valuations. And the word being whispered is ‘bubble’.
Let us be clear: I am not Luddite. The productivity gains from generative AI are real. But the market mechanism has a habit of overcorrecting. When a company with £20 million in turnover and no profit commands a market cap of £2 billion, the red lights flash. We have seen this before. The dot-com bubble gave us Pets.com. The current frenzy has given us chatbots that write poetry and design logos. Useful? Perhaps. Worth a collective £500 billion of investor capital? That is the question that keeps the Bank of England’s Financial Policy Committee up at night.
The trigger for this sell-off was a routine comment from Andrew Bailey. Speaking to the Treasury Select Committee, he remarked that “some asset prices look stretched, particularly in the technology sector.” That was enough. Markets hate uncertainty. They detest a central banker who hints at a correction. Within hours, the FTSE 250’s tech index fell 8%. Capital flight from risk assets accelerated. The gilt market, always the barometer of fear, saw yields spike briefly as investors fled to cash.
The numbers bear scrutiny. The ARK Innovation ETF, a favourite of retail speculators, is down 22% year-to-date. Nvidia, the bellwether of AI chips, has slumped 18% from its peak. In London, Darktrace and Ocado Group have been hit hard. Darktrace, once hailed as a cybersecurity AI champion, has seen its valuation halve from its 2021 high. The market is abruptly pricing in a more sober future.
What does this mean for the wider economy? First, inflation. If the AI bubble deflates, expect a drag on headline CPI via lower capital goods prices. But that is cold comfort. The deeper concern is the allocation of capital. For two years, cheap money has poured into speculative AI ventures, diverting resources from infrastructure and manufacturing. A correction could free up capital for more productive uses. But the transition will be painful. We may see a spike in corporate defaults from over-leveraged startups.
Second, the fiscal picture. The Chancellor has been betting on a tech-led recovery to boost tax receipts. If AI stocks collapse, the Treasury’s revenue forecasts take a hit. That means either higher borrowing or spending cuts. Given the current debt-to-GDP ratio of 100%, there is little room for error. The bond market will punish any sign of fiscal indiscipline.
Finally, there is the impact on consumer confidence. The ‘wealth effect’ cuts both ways. When retail investors see their ISA portfolios shrink, they spend less. That could dampen the already sluggish consumer spending we have seen this autumn.
To be clear, I do not predict a full-blown crash. But the market is signalling a correction. The prudent investor should look beyond the AI hype. Consider utilities, defence, and other sectors with tangible earnings. The era of free money is over. The hangover has begun.
In the City, we have a saying: ‘Bulls make money, bears make money, pigs get slaughtered.’ The AI pigs are squealing. The rest of us should listen.
