It was only a matter of time. After months of relentless exuberance around artificial intelligence stocks, the market is finally waking up to the scent of trouble. The FTSE 100 may have brushed off concerns for weeks, but the latest sell-off in AI-linked shares has forced regulators to admit what many in the City have been muttering over their morning espresso: this rally is built on sand, not solid earnings.
The Financial Conduct Authority has today issued a terse statement, pledging to 'support responsible innovation' in AI while 'monitoring market stability.' Translation: they see the froth, and they are worried. But as ever, the regulator is caught between a rock and a hard place. Push too hard, and they risk choking off the very innovation that could boost UK productivity. Do too little, and they invite a repeat of dot-com madness with a better script.
Let us be clear: the recent surge in AI stocks is a textbook speculative mania. Companies with no clear path to profitability are trading at multiples that would make a tech unicorn blush. Investors are piling in on the promise of 'transformative technology' without asking the uncomfortable questions: who is paying for all this compute power? When will the revenue justify the capex? The answers, for most, are 'advertisers' and 'not anytime soon.'
Meanwhile, gilt yields have crept higher as the market reprices risk. The Bank of England’s cautious stance on rates is doing little to cool animal spirits. Capital is still flowing into AI names, but the outflow from defensive sectors is telling. When utilities and consumer staples get sold to buy more Nvidia, you know we are in the late cycle.
The FCA’s 'responsible innovation' agenda is a noble sentiment, but it reeks of the same regulatory capture that allowed the 2008 crisis to fester. They want to encourage growth while preventing a crash. It is a fantasy. Bubbles burst precisely because regulators wait too long, afraid to spoil the party.
For the retail investor, the warning is clear: do not confuse narrative with value. The bottom line is that yields are rising, inflation is sticky, and the market’s favourite narrative is always the most dangerous. The City has seen this play before. It never ends well.
Alastair Thorne
Chief Financial Editor
