Susannah Streeter, Chief Investment Strategist, Wealth Club:
‘Fresh panic over the AI trade has hit Wall Street hard, with a steep sell-off on the Nasdaq, and the S&P 500 sending shockwaves rippling to other markets. Fears that the vast sums poured into AI infrastructure may not deliver the returns investors have been banking on are now colliding with the prospect of a sharp slowdown in data centre construction. Chip stocks have been the hardest hit with AMD down 13%, Nvidia falling around 7% and Intel another 5.5%.
The contagion is spreading – the FTSE 100, which had been on the front foot and is far less exposed to big tech, has now erased its earlier gains and turned negative. Even a tech-lite index with defensive appeal hasn’t been able to shrug off this big case of the jitters.
The relief that followed the Democrats’ mid-term success has evaporated. Hopes of an orderly outcome, with no attempt by Trump to contest the result, have given way to worries about the road ahead for AI. Data centres became such a hot political issue on the campaign trail that anger among voters is fuelling expectations of a dramatic slowdown in the build-out. There are reports that the Democratic leadership taking control of Congress in January have listed AI regulation and data centre expansion as core priorities to tackle. That’s piling pressure on a sector already facing tough questions about whether returns will keep pace with the eye-watering investment, and it’s why the falls have been so steep.
The bigger worry is what this means beyond the tech trade. Spending on AI infrastructure accounts for a big chunk of GDP, through demand for components, manufacturing and construction but also the knock on effect to wealth. Americans live in the world’s largest economy, and many feel wealthier when share prices rise, through pensions, investment accounts and the value of tech-heavy portfolios, which has kept spending buoyant. If this fall deepens, that sense of wealth could take a real knock, making households more cautious about spending. With US consumers so central to global growth, that would be felt well beyond Wall Street.
Elsewhere, oil prices have been creeping back higher with Brent around $97 a barrel, as uncertainty continues to reign over the outcome Middle East crisis. Prices had declined slightly but are still are around a third higher than before the conflict broke out, which is why the Bank of England raised rates by a quarter of a percentage point. The hawkish nature of the decision with one member of the MPC Catherine Mann calling for a 0.5% hike has also sharpened focus on inflationary pressures and how chronic the energy crisis has become.”
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