The London market took a sharp hit this morning as contagion from Wall Street’s tech rout spread across the Atlantic. The FTSE 100 tumbled over 2% in early trading, dragged down by heavy losses in heavyweight mining and energy stocks, as investors fled risk assets amid fears that the US tech bubble has finally burst.
The trigger was a savage sell-off in New York overnight, where the Nasdaq Composite plunged 4.5%, its worst single-day drop since 2022. The Magnificent Seven stocks Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia and Tesla collectively lost over $500 billion in market capitalisation. Nvidia, the poster child of the AI boom, fell 8%, while Tesla shed 10% after disappointing delivery numbers.
City traders, already jittery about sticky inflation and the prospect of higher-for-longer interest rates, saw this as the moment the froth comes off the punch bowl. “This is a classic bubble deflation,” said one veteran trader on the London Stock Exchange floor. “When the tech leaders start crumbling, it’s a signal that the whole edifice is unstable. Investors are waking up to the reality that valuations are detached from earnings.”
The sell-off was indiscriminate in London. The FTSE 250, a barometer of domestic sentiment, dropped 1.8%. Retailers, housebuilders and banks all fell, with the UK’s big lenders Lloyds, Barclays and NatWest down between 2% and 3%. The pound weakened against the dollar, slipping below $1.26, as currency markets repriced the risk of a global slowdown.
But the real story is the capital flight from tech. The UK’s tech-lite index has been a haven for yield-hungry investors, but today even defensive sectors like utilities and healthcare were not immune. The only bright spot was gold, which edged up to $2,350 an ounce, as nervous money sought safety.
The sell-off raises critical questions about the Bank of England’s next move. Inflation has been stubbornly above target, and the MPC had been leaning towards a rate cut later this summer. But a stock market crash could complicate that calculus. “Central banks are between a rock and a hard place,” said a former BoE official. “If they cut rates now, they risk stoking asset bubbles further; if they hold, they risk a full-blown correction.”
The US Federal Reserve is in the same bind. The Fed’s preferred inflation gauge, the core PCE, remained at 2.8% in March, well above the 2% target. Futures markets are now pricing in only one rate cut this year, down from three in January. That realisation is causing a painful repricing of risk across all assets.
The Big Tech bubble has been inflated by a decade of cheap money and zero interest rates. The pandemic years saw an explosion of retail trading, meme stocks and crypto mania. Now, with interest rates at 5.25% in the US and 5.25% in the UK, the cost of capital has risen sharply. Companies that promised future growth at any price are being marked down. Meta, for instance, now trades at 22 times forward earnings, down from 35 times two years ago. Still, many argue that even these lower multiples are too high for a company facing regulatory headwinds and declining user growth.
For UK investors, the pain is twofold: direct exposure to US tech through American Depositary Receipts (ADRs) and indirect exposure via UK-listed funds that track US indices. The iShares S&P 500 ETF, a popular holding in UK pension funds, fell 3% today. Private investors who piled into tech-heavy investment trusts are nursing heavy losses.
The question now is whether this is a healthy correction or the start of something worse. The last time the Nasdaq fell 30% in 2022, it was followed by a recovery. But that was when the AI boom was just getting started. Today, the hype around AI has led to massive capex by Big Tech, but the returns are still uncertain. Nvidia’s data centre revenue, which drove its meteoric rise, could slow if customers like Google and Meta cut back on spending.
In the City, the mood is cautious but not panicked. “We’ve seen this movie before,” said another trader. “The difference is that this time the macroeconomic backdrop is much worse. High inflation, high rates, geopolitical tensions and a US election year. It’s a recipe for continued volatility.”
The bottom line: the era of easy money is over. The bill for years of fiscal and monetary profligacy is coming due. Investors who have ridden the tech wave must now strap in for a bumpy ride. The only consolation for UK holders of gilts is that a flight to quality could push yields down, but that is cold comfort when your equity portfolio is bleeding red.
