The froth is finally being skimmed. London markets, often dismissed as a backwater of ex-growth utilities and miners, have outshone Wall Street this week as a sharp sell-off in American equities punctured the ballooning valuations of the Magnificent Seven. For those of us who have long warned that the AI narrative was pricing in a decade of revenue growth in a single quarter, this is less a surprise and more a confirmation of gravity asserting itself.
The catalyst was a double dose of reality. First, Federal Reserve minutes revealed that policymakers are in no rush to cut rates, with inflation still stickier than a Treasury trader’s fingers after a bad lunch. Second, earnings from a certain chipmaker—let’s call it the party’s main guest—failed to dazzle the algorithms that had bid its shares to multiples that would make 1999 look modest. The result was a 3% drop in the Nasdaq, with the S&P 500 shedding over £1 trillion in market cap in a single afternoon.
Meanwhile, the FTSE 100 dipped a mere 0.5%, and the domestically focused FTSE 250 actually eked out a gain. Why? Because London never bought the hype. UK equities are trading on a price-to-earnings ratio of around 12, compared to 24 for the S&P. Our market is full of cash-generating businesses that actually earn money, not promises of future dominance. Energy stocks, financials, and defensive sectors held up as investors rotated out of tech and into value. It is the old tortoise versus hare story, and the tortoise is currently sipping tea in the lead.
This rout exposes the fragility of the AI bubble. The technology is real, but the monetisation is uncertain. Capital expenditure on data centres has exploded, but where is the matching revenue? Companies like Microsoft and Alphabet have thrown billions at AI, yet their search and cloud segments still do the heavy lifting. The market had priced in a certainty of exponential growth that is far from guaranteed. When interest rates remain high, the present value of those distant earnings shrinks, and the maths turns ugly.
For the UK, this divergence is a double-edged sword. On one hand, it validates our market’s relative cheapness and lower leverage to hype. Pension funds and foreign investors who fled London for American tech are now nursing losses. But the downside is that Britain’s underperformance has been a symptom of low growth, not just caution. If global risk appetite wanes, we could see capital flight from all equities, and our smaller, less liquid market would suffer disproportionately. The pound has already slipped against the dollar this week, a classic flight-to-safety move.
The Bank of England faces a delicate dance. Inflation in services remains above 5%, and wage growth is stubborn. But if the US slowdown spreads, the MPC may need to cut sooner than it wishes. The yield on 10-year gilts has fallen sharply this week, reflecting a flight to safety and expectations of looser policy. That is good for the government’s borrowing costs but bad for savers and the pound’s credibility.
Ultimately, this is a healthy correction. The market is rediscovering the concept of risk. For too long, investors treated Big Tech as a one-way bet, ignoring valuation in favour of momentum. The rout is a reminder that trees do not grow to the sky. And for once, London is not the one falling fastest. Whether this marks a lasting rotation or a temporary reprieve depends on whether the AI earnings materialise. My bet is on the tortoise.
