A very different reaction last week
Markets delivered a striking contrast last week. The technology-heavy Nasdaq fell 4.5%, its worst week since June, while the FTSE 100 enjoyed its strongest week in six months.
The reason? Investors are questioning the enormous sums being borrowed to finance artificial intelligence, while higher oil prices and renewed inflation concerns complicate the outlook for interest rates.
S&P 500
-1.9%
Last week
FTSE 100
+3.1%
Last week
US 10-year gilt
5.1%
Last week
Brent Crude
$109.86
Last week
The big picture
The AI trade is facing its toughest test yet
For much of 2026, artificial intelligence has provided the main support for US equity markets. Investors have accepted extraordinary levels of spending on data centres and computer chips because they expect substantial future profits.
Last week, that confidence weakened.
Shares in several AI infrastructure companies fell sharply as investors became concerned about their borrowing requirements. Meanwhile, September’s US inflation figures were stronger than expected, and Brent crude climbed towards $110 a barrel.
But there was an important development beneath the headlines. Money moved away from expensive US technology shares towards government bonds and more defensive equity sectors.
The question now is whether the recent technology sell-off represents a healthy reassessment of valuations or something more serious for the AI investment cycle.
That makes next week’s earnings announcements particularly important.
Last week: Three things that mattered
AI shares suffered as investors questioned the cost of the boom
What happened?
The Nasdaq fell 4.5% over the week, while semiconductor shares experienced particularly heavy selling.
CoreWeave, which provides computing infrastructure for AI companies, fell approximately 25% during the week. Its shares lost around 12% on Friday alone.
Investors became increasingly concerned about debt-funded AI infrastructure. Some CoreWeave bonds were offering yields above 15%, reflecting growing doubts about financing risks.
Other technology companies also suffered, including Dell, Broadcom and several semiconductor manufacturers. Reuters
Why markets reacted
AI infrastructure requires enormous investment before revenues arrive.
Higher borrowing costs make these projects more expensive and increase the amount of future income needed to justify them.
Investors are questioning whether every company spending heavily on AI will earn an adequate return.
Why this matters
The AI opportunity hasn’t disappeared, but the market is becoming more selective.
Companies with strong balance sheets, established customers and healthy cash generation may be better placed than businesses relying heavily on borrowing.
For investors holding global index funds, this matters because the largest US technology companies represent a substantial proportion of their equity exposure.
2. US inflation rose again, raising questions about interest rates
What happened?
September US inflation increased to 3.7%, compared with 3.4% in August.
Consumer prices rose 0.6% during the month, with gasoline prices jumping 9.1%.
Core inflation, which excludes food and energy, increased to 2.6% annually, suggesting that price pressures extend beyond the energy market. Reuters
Why markets reacted
The Federal Reserve raised rates in September, but investors had recently hoped that slowing employment might reduce the need for further increases.
Higher inflation challenged that assumption.
Markets briefly increased expectations for another rate rise at the Fed’s October meeting.
However, government bonds subsequently rallied as investors sought protection from falling technology shares. The US 10-year Treasury yield ended the week near 5.10%, down substantially from recent highs. The Wall Street Journal
Why this matters
Higher inflation normally creates problems for both shares and bonds.
But last week demonstrated that government bonds can still attract investors when concerns about economic growth or financial stability increase.
For diversified portfolios, the relationship between shares and bonds remains important.
Oil approached $110, but UK shares outperformed
What happened?
Brent crude reached $109.86 a barrel, its highest level in five months.
Renewed attacks affecting Saudi energy infrastructure and continued disruption to shipping through the Strait of Hormuz raised concerns about global supplies. Financial Times
Meanwhile, the FTSE 100 gained 3.1%, supported by investors moving into energy companies and defensive sectors.
UK economic news was also relatively encouraging. August GDP grew 0.1%, avoiding the small contraction economists had expected. Spreadex
Why markets reacted
Rising oil prices benefit energy producers but increase costs for consumers and businesses.
The FTSE 100 contains several large energy, healthcare and consumer-staples companies. These sectors can attract investors when confidence in technology shares weakens.
Why this matters
The contrasting performance of the FTSE 100 and Nasdaq provides another reminder of the benefits of geographic and sector diversification.
An investment portfolio concentrated in US technology experienced a very different week from one holding a broader range of global companies.
This week: What investors should watch
1. UK inflation: Wednesday 21 October
Wednesday’s UK inflation report is arguably the most important domestic economic release of the week.
Annual inflation stood at 3.1% in August, and investors will be looking for evidence that higher energy costs are spreading into other prices.
Markets are already expecting another Bank of England rate increase at its 5 November meeting. CMC Markets
What could surprise investors?
A lower-than-expected reading would reduce pressure on the Bank of England and could help gilts and UK companies sensitive to borrowing costs.
Higher inflation would strengthen expectations of another increase, potentially supporting sterling while pushing bond yields higher.
Pay particular attention to services inflation, which provides clues about underlying domestic price pressures.
2. Meta and Tesla earnings: the AI reality check
This week’s biggest corporate event may be Meta’s results.
Investors will scrutinise its spending on AI infrastructure and whether increased investment is producing stronger advertising revenues and profits.
Tesla also reports, with attention focused on vehicle demand, margins and the profitability of its AI-related ambitions.
Semiconductor equipment company Lam Research provides another useful indication of demand for advanced manufacturing technology.
What could surprise investors?
Strong earnings accompanied by disciplined spending could restore some confidence in technology shares.
Disappointing forecasts or another substantial increase in capital expenditure could prolong the sell-off.
The market is increasingly demanding evidence of financial returns rather than simply higher AI investment.
3. China GDP: Monday 19 October
China publishes third-quarter economic growth figures, alongside September industrial production and retail sales.
The results matter because China remains a major source of demand for commodities and manufactured goods.
Stronger economic activity could support mining companies, industrial businesses and emerging-market equities.
Weaker consumption or industrial production would raise questions about Chinese domestic demand, particularly given the country’s continuing reliance on exports.
For UK investors, China’s performance matters because large FTSE 100 mining companies are closely exposed to global commodity demand.
4. Friday’s business surveys
Preliminary purchasing managers’ indices for the US, UK and eurozone will provide an early indication of October’s economic activity.
These surveys ask businesses about orders, employment, output and prices.
Investors will be watching for a difficult combination: slowing economic activity alongside rising costs.
Stronger growth and easing prices would support confidence in company earnings.
Weaker activity with persistent inflation would leave central banks facing uncomfortable choices.
Investment Insight
After the hype AI will need to be a sound investment proposition
Last week’s technology sell-off offers an important lesson.
A technology can change the world without every company associated with it becoming a successful investment.
Artificial intelligence is creating demand for enormous computing resources. Businesses are investing in data centres, semiconductors, electricity generation and networking equipment.
Yet much of that expenditure must occur before companies receive the full financial benefits.
Consider two businesses investing £10 billion in AI infrastructure.
The first finances its investment from existing profits and already has customers committed to using its services.
The second borrows most of the money and hopes sufficient demand will emerge over the next five years.
Both companies may benefit from the same technological developments. But their financial risks are very different.
Higher interest rates make that distinction more important.
Companies dependent on borrowing must generate enough income to cover financing costs before shareholders receive meaningful returns.
This is why investors should look beyond revenue growth to examine free cash flow, debt levels and returns on invested capital.
Free cash flow is the money remaining after a business has paid its operating expenses and necessary capital investment.
For long-term investors, there is no need to abandon AI-related investments. But holding diversified global funds rather than making concentrated bets on individual companies can reduce the risk of choosing the wrong winners.
Five Things I'll Be Watching
UK inflation: Wednesday’s CPI report could influence the Bank of England’s November interest-rate decision.
-
- Meta earnings: Investors want evidence that substantial AI spending is generating worthwhile returns.
- US Treasury yields: A sustained fall towards 5% could relieve some pressure on equity valuations.
- Brent crude: Oil approaching $110 raises the risk of further inflation and pressure on company profit margins.
- Market breadth: Whether investors continue moving beyond US technology into other sectors and regions will provide an indication of confidence.
Final thought
Last week demonstrated how quickly investor sentiment can change.
Companies that attracted considerable enthusiasm only a few months ago are now being questioned about their borrowing, spending and future profitability.
Yet other parts of the market performed well.
The FTSE 100’s strong week, despite a difficult period for US technology shares, is a useful reminder that global markets rarely move together.
