Investors watching the recent slide in U.S. technology shares are being told to consider the U.K. equity market as potentially more durable if the AI-led rally unravels. In a client note, Capital Markets highlights structural and macro reasons why the FTSE 100 could hold up better than many peers in the event of an AI bubble bursting, even as geopolitical tensions between the U.S. and Iran have so far supported parts of the index.
Year-to-date, the FTSE 100 has gained 9.21% and is up about 2% over the past month. By comparison, the more tech-focused Nasdaq 100 has risen 12.17% YTD but has fallen 3.6% over the past month. Those contrasting short-term moves illustrate how differently markets with distinct sector weights can react to swings in sentiment and external shocks.
"If the AI-fuelled equity bubble is in the process of bursting, we think the UK stock market will hold up better than most of its peers, unlike after the dotcom crash," said Joe Maher, the firm’s Markets Economist, in the note.
Capital Markets argues the situation differs from the early 2000s dotcom episode for three principal reasons.
- Lower direct tech exposure: Prior to the dotcom peak, tech-related sectors - broadly defined as IT and Communication Services - accounted for roughly 30% of the MSCI UK Index. The firm notes that those sectors now represent only around 3% of the index. Because the U.K. had a much larger direct exposure to internet-era stocks back then, the correction in technology shares inflicted heavier damage on U.K. equity performance. With substantially less weight in today's tech leaders, the market's defensive composition should reduce its vulnerability to a concentrated tech selloff.
- Expected macro resilience: The dotcom bust coincided with the U.S. slipping into recession in 2001, which amplified the global equity downturn. Capital Markets says the current outlook is different: economic activity in the U.S. is expected to be resilient even if AI enthusiasm fades. That resilience should, the firm posits, limit the depth of any global equity drawdown and help support markets such as the U.K.
- Potential dollar weakness: The note also points to currency dynamics. "If the AI boom turns to bust, we expect a shift towards monetary easing from the Fed and a faltering in capital flows into the US to prompt broad weakness in the dollar, including against sterling," Maher said. The firm nonetheless remains broadly bearish on sterling overall because it expects the Bank of England to cut interest rates next year.
Capital Markets also cautions that some sources of the FTSE 100's recent resilience are likely temporary. Energy companies, a notable component of the index, benefited from elevated oil prices amid the escalation of U.S.-Iran tensions. Financial firms, another significant cohort on the exchange, have also earned gains from the market volatility. The research note indicates these supports may fade.
Finally, the firm maintains its forecast that the AI bubble will burst within the next year and adds that "it’s possible that this process is already underway."
Market context and implications
The note frames the U.K. market’s relative positioning as a combination of sectoral composition and macro expectations. Reduced direct exposure to large-cap technology names, an anticipated resilient U.S. economy that would curb a global equity contraction, and a prospective weakening of the U.S. dollar are presented as the main factors that could help the FTSE 100 absorb fallout that might more severely impact tech-heavy benchmarks.
At the same time, the research cautions that some recent drivers of U.K. outperformance - notably energy and financials buoyed by geopolitical risk and market turbulence - may not provide a sustained cushion if those conditions normalise.