WeeklyWatch – AI dominance sparks investor fear
25th November 2025
Stock Take
AI fears shake the markets
In Japan during the 1980s, at peak stock market bubble, Tokyo’s Imperial Palace was estimated to be worth more than all the real estate in California. Unsurprisingly, the asset bubble burst as a result of the Bank of Japan raising their interest rates when they tightened their monetary policy.
Today, the opposite looks to be the case. In the MSCI All Country World Index (ACWI), only one company makes up over 5% of the overall index – Nvidia. To compare, Japan, which has one of the largest economies in the world, makes up just 4.89% of the index. The reason behind Nvidia’s rapid rise in value? Increased optimism surrounding AI which is largely reliant on Nvidia chips. Over recent years, these high levels of optimism have boosted the overall S&P 500.
The Equity Strategist at St. James’s Place, Carlota Estragues Lopez, identifies how the S&P 500 has experienced a huge rise since AI tech began to dominate the markets in October 2023. She states:
“Despite earnings strength being priced in, positive sentiment regarding AI companies continues to drive prices higher, which raises concerns over a potential price bubble. This is why investors are closely watching the most recent earnings season and markets are strongly reacting to disappointing results.”
Avoiding a dotcom repeat?
Investment awareness has increased, particularly when it comes to competing in the AI race. Expenditure was up 50% for Microsoft to US$16.8 billion in the third quarter, and Meta raised their 2025 guidance for capital expenditure to between US$70 billion and US$72 billion, for example.
These figures can be a cause for concern, with numerous investors remembering the dotcom bubble at the start of the millennium and some recalling the sub-prime mortgage bubble from 20 years ago in the US.
Consequently, investor nerves have resulted in market struggle over the last few weeks.
But it’s important to remember that there are big differences between now and other recent bubbles. One of which is that the big players today are profitable. Microsoft are an example of this, reporting a Q4 operating income of US$34.3 billion (an increase of 23% compared to the same period last year) as part of their latest results.
Estragues Lopez notes:
“Today’s technology giants have large cash buffers, which makes it more unlikely that we will see a systemic 2008-style crisis. There is a degree of operational interdependence, so if one of the ‘megacaps’ revenues suffers, this is likely to impact another, but they are ultimately independent, very profitable companies, well placed to absorb losses. It is unlikely that we will see a domino effect if one company fails.”
Investors continued to keep a close eye on Nvidia’s results from last week as they’re a key indicator of the health of the tech sector. The results showed that they beat expectations, however, it wasn’t enough to completely ease fears over a bubble.
Just one company having such a big impact on markets could be a warning sign regarding the dangers of concentrated portfolios. Estragues Lopez adds:
“The key takeaway from the past week should be that diversification is more important than ever.”
The data carries less weight
On home soil, it was revealed by the Office for National Statistics last week that UK inflation fell to 3.6% in October.
Even though the figure is significantly above the Bank of England’s 2% target, it’s the first figure drop since March 2025. ‘Sticky’ services inflation also experienced a drop, from 4.9% to 4.6%.
A fall in inflation has boosted hopes of an interest rate cut next month, but much will depend on what’s revealed in the Autumn Budget, due to be announced tomorrow. The uncertainty surrounding the Budget resulted in a slowing down in consumer spending in October, when it had been expected by economists to have stayed flat or grown.
Japan increase their spending
There was a significant rise in Japanese government bond yields last week. The Asian economy is facing big challenges:
- The AI concerns over in the US have had a global impact.
- Japanese and Chinese tensions have increased following Japanese Premier Sanae Takaichi saying that if Taiwan were invaded by China, a Japanese military response could be triggered.
Despite these difficulties, the Japanese markets responded to a large stimulus bill in a bid to encourage growth.
The Head of Asia and Middle East Investment Advisory and Comms at St. James’s Place, Martin Hennecke, says that the sharp rise in Japanese bond yields alongside the AI market concerns are a strong reminder on why diversification is important. He says:
“It also acts as a reminder of the severe risks of using leverage when investing. That includes borrowing in any other currencies, which can easily result in investors getting stopped out of positions at unfavourable times and be subject to much higher loss risks than assumed.”
Wealth Check
Increase in cash deposit protection limit
Benefits for savers are coming into place next week with increased protection on cash deposits and savings.
The limit will be increased to £120,000 from £85,000 from 1st December by the Financial Services Compensation Scheme (FSCS). But what exactly does this mean for you? If a bank or building society fails, savers will have up to £120,000 of their deposit protected, per institution. For joint savings accounts, the protection will increase to £240,000 (£120,000 per person).
There’s also been an uplift in the amount protected under so-called ‘temporary high balances’ – such as those from property sales or insurance payouts. There will be a rise from £1 million to £1.4 million for six months.
As the Autumn Budget reveal draws close, many are waiting to see how hard and where the axe will fall. Reports from last week suggested that working pensioners may face higher taxes and electric vehicle owners could face new charges. There has been some speculation surrounding possible property taxes but until Chancellor Rachel Reeves makes the official announcement, nothing is certain.
Please get in touch if you have any questions following the Budget.
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