The City of London is bracing for a correction as the artificial intelligence stock market bubble shows signs of imminent deflation. After months of irrational exuberance, the cracks are appearing. The FTSE 100 has been dragged higher by a handful of AI stocks.
But the rot is spreading. Gilt yields are rising sharply as investors flee risk assets for the safety of government bonds. Capital flight is accelerating.
The Bank of England is caught in a bind. Inflation remains stubbornly above target, yet raising rates further risks bursting the bubble entirely. The parallels with the dot-com crash are impossible to ignore.
Then, as now, markets priced in years of future earnings growth that may never materialise. The difference this time is the scale. AI has been touted as the next industrial revolution.
Billions have been poured into companies with no clear path to profitability. The market is now asking: where is the return on investment? The answer appears to be nowhere.
Nvidia, the poster child of the AI boom, saw its stock price soar 200% in a year. But even its latest earnings report failed to impress the sceptics. When the leader stumbles, the rest follow.
British investors who piled into AI funds are now facing losses. The question is whether this is a buying opportunity or the start of a prolonged downturn. I suspect the latter.
The fundamentals do not support current valuations. The hype has outpaced reality. As any seasoned investor knows, when the music stops, the exit door is small.
The prudent move now is to reduce exposure. Cash is king. Central banks cannot save us this time.
They are already behind the curve. The era of cheap money is over. The AI hangover is here.
