The froth is lifting from the markets, and it smells of panic. For months, the City of London has watched the AI stock rally with a mixture of greed and disbelief. Now, the hangover is setting in. The yield on 10-year gilts has crept above 4%, a level that historically punctures speculative excess. Capital is fleeing growth stocks for the perceived safety of bonds, and the tech-heavy indices are feeling the squeeze.
Let's be clear: this is not a crash yet. But the tremors are unmistakable. The S&P 500 has shed 5% in a month, with the likes of Nvidia and Microsoft bearing the brunt. The FTSE 100, with its stodgy dividend payers, has held up better, but the contagion is spreading. The Bank of England, still nursing its wounds from the Truss era, is watching the gilt market with hawkish eyes. Any hint of rate cuts being priced out will only accelerate the exodus.
Why now? The AI trade was built on promises. Promises of productivity gains, revenue growth, and a new industrial revolution. But the market has a short memory for promises. The recent earnings season delivered a reality check: AI spending is up, but revenue is lagging. The buzzword is 'monetisation'. Investors are demanding to see the cash flow. And they are not seeing it.
Meanwhile, the regulatory noose is tightening. The European Union's AI Act is moving from draft to law, and the US is not far behind. Compliance costs will bite. And let's not forget the geopolitical headwinds. The chip war between the US and China is escalating, and Britain is caught in the crossfire. Capital controls? Export bans? The uncertainty is toxic for valuations.
What does this mean for the average punter? If you are holding a passive tracker heavy in US tech, you are exposed. The rotation out of growth and into value is happening in real time. Gilts, gold, and even cash are looking attractive again. The era of free money is over. The era of fiscal discipline is back in vogue.
As for the Bank of England, they face a delicate balancing act. Inflation is sticky, but a crash would be worse. They will likely hold rates, hoping that the market corrects itself. But central banks have a poor track record of popping bubbles gently. They tend to let them inflate until they burst, then clean up the mess.
My advice? Keep a close eye on the VIX. If it spikes above 30, we are in for a rough ride. And remember: when the tide goes out, you see who is swimming naked. The AI hype is starting to reveal a lot of bare skin.
