London markets weathered the storm on Thursday, with the FTSE 100 showing surprising resilience even as Wall Street suffered its worst day in months. The divergence tells a story of two economies: one chasing growth at any cost, the other anchored by value and dividends.
The S&P 500 fell 2.8 per cent, its sharpest decline since September, as a wave of profit-taking swept through the technology sector. The trigger was a disappointing earnings report from a leading AI chipmaker, whose shares tumbled 12 per cent after it cut its revenue forecast. This has reignited fears that the artificial intelligence boom, which has driven much of the market's gains over the past year, may be running ahead of reality.
In the City, however, the mood was notably calmer. The FTSE 100 closed down just 0.3 per cent, supported by gains in energy and mining stocks. The contrast is stark. The UK's benchmark index is heavily weighted towards sectors that benefit from higher commodity prices and inflation such as oil, gas and mining. It has only a 1.5 per cent exposure to the technology sector, compared with nearly 30 per cent for the S&P 500.
This is not a bug but a feature. For years, investors have bemoaned the UK market's lack of tech darlings. Today, that same structure is providing a buffer against the AI correction. When the glamour stocks get hit, the boring ones look awfully attractive.
The sell-off on Wall Street has also sparked a flight to safety. The yield on the 10-year US Treasury note fell 10 basis points to 4.15 per cent, while gilt yields dropped 8 basis points to 3.98 per cent. This suggests the market is pricing in a potential slowdown, perhaps even a recession, driven by overinvestment in AI infrastructure.
The Bank of England will be watching closely. If the correction deepens, it could ease inflationary pressures by reducing wealth effects and slowing consumer demand. But it also risks triggering capital flight from emerging markets.
Some analysts argue the AI sell-off is overdue. Capital spending on AI has surged to levels not seen since the dot-com bubble. In the US, the 'Magnificent Seven' tech stocks now account for over 30 per cent of the S&P 500's market capitalisation. When a handful of companies carry that much weight, any wobble can rattle the entire market.
The UK's relative insulation is cold comfort. A sustained downturn in the US would eventually hit British exporters and dampen global demand. But for now, London is proving that boring can be beautiful. The FTSE 100's dividend yield remains above 3.5 per cent, offering income when growth is fading.
The question is whether this resilience is a temporary shelter or a sign of deeper structural strength. For the moment, investors are rewarded for sticking with the old economy. But if the AI revolution is truly a bust, we may see a more profound shift in market leadership.
For now, the message from the markets is clear: caution is back in fashion. And in the City, that is not such a bad thing.
