Weekly Comment: Trick or treat?

Tis the season and all that. Last week, as children were counting down the days to Halloween, their one-day licence to knock on doors and ask for sweets in exchange for not squeezing toothpaste through letterboxes, stock markets, specifically the artificial intelligence (AI) trade, were having their own Halloween moment. But as with everything AI-related, the tech sector plays trick-or-treat according to its own rules. First, investors are the ones being offered a treat (a stream of attractive returns stretching out to eternity); and secondly, investors are asked to pay up now in the hope of getting the treat at some point in the future rather than on the doorstep.

Market overview

HallowAIen

For much of the past couple of years, markets have given the so-called hyperscalers the green light to invest billions into the data centres and other infrastructure required for the great AI roll-out. Ah those were the days. Based on the market reaction to Q3 numbers from Alphabet, Amazon, Meta and to a lesser-extent Microsoft, those days are over (for now at least). The four announced combined capex of US$207bn in Q3, almost double the US$113bn they invested the prior year. The four also confirmed plans to spend another US$232bn in Q4. That would bring total capex for the year to US$740bn. Such a quantum of investment has had a significant impact on the cash flow profiles of three of the hyperscalers—Alphabet, Amazon and Meta. Rewind to Q3 2025 and these three generated US$36.4bn of free cash flow. One year on and the same trio SPENT US$45.2bn cash (source: Financial Times). To fund the roll-out, all three have been increasingly tapping bond and equity markets—Meta announced a US$95bn equity raise following its results.

Perhaps markets would have taken the capex and cash burn numbers in their stride had they believed returns on these investments were just around the corner. Growing opposition to data centres from local communities and politicians alike, calls for regulation from frontier model developers themselves and a higher cost of capital courtesy of rising yields threaten to push the promised land of perpetual AI-generated returns further out into the future. In the case of Alphabet there were also signs that AI-answered queries were eating into its core search engine business. Cue share price weakness across the four hyperscalers and other AI-related stocks.

Treats elsewhere

The risk-off move in global equities was largely confined to the AI trade. Investors looking to lighten tech exposures proved something of a treat for less-headline-grabbing areas of the market. In the US for example, value names comfortably outperformed their growth counterparts—value stocks were up 0.5% so that they now boast a year-to-date (YTD) gain of 24.5%. The same was true for small caps which were up 1.3% on the week (+14.5% YTD). Compare that to growth, home of the tech sector, which fell 1.7%, pushing the YTD performance into negative territory (-0.2%). It was a similar story in the UK, the ultimate AI-lite index, where both large and mid-caps ended the week in positive territory. Europe got in on the act too with indices across the region rising.  A reminder that it’s not just the AI-trade that can dish out treats to investors.

A fright-free UK Budget

Last week saw the much-anticipated UK Budget come and go. Chancellor John Healey announced giveaways totalling £7.6bn for 2026-27 (source: Financial Times), but he also unveiled plans to fund these via gross tax rises in the region of £9bn. He also chose not to tackle problematic issues such as public spending this time round, promising to look at these at a later date (presumably in the hope macro conditions become more favourable). The relatively small numbers (remember the £66bn raised by Rachel Reeves in her two budgets), together with giveaways and takeaways balancing each other out, meant the Budget lived up to its ‘do-no-harm’ billing. Certainly, bond markets didn’t take fright with gilt yields barely budging on the day.

It’s not over yet…

Anyone thinking that’s the end of trick-or-treat season for another year, think again. This week’s US midterm elections bring their own trick-or-treat dilemma. Back in September, President Trump promised a US$5,000 payout for every adult in the US if his Republican Party kept control of both houses of Congress. Coming with a US$1.3tn price tag, the enticement does not come cheap. US voters will therefore have to decide for themselves if Trump’s offer is the ultimate trick or treat.

Weekly market moves:

The MSCI All Country World Index (MSCI ACWI) ended the week 0.3% lower so that the YTD gain now stands at 11.6%.

United States:

US stocks underperformed global equities after falling 0.6% (+11.7% YTD).  As mentioned earlier, weakness was centred around the technology sector with value stocks posting decent gains. For US Treasuries the risk-off tech move outweighed the week’s economic data. These largely pointed to a US economy that is growing at a fair clip: annualised GDP growth for Q3 came in at 3.4% compared to the 3.0% expected; while the personal consumption expenditures price index rose 0.5% month-on-month so that year-over-year it stands at 3.6%. The numbers were in keeping with Federal Reserve (Fed) commentary that accompanied its widely anticipated decision to keep rates at 3.75% to 4.00%—the Fed swapped “solid” for “strong” when describing the economy. Despite this, the yield on the 10-year Treasury fell seven basis points to 4.93% (up 76 basis points YTD). The 2-year yield dropped by the same amount to 4.59% (up 112 basis points YTD).

United Kingdom:

UK stocks were among the week’s outperformers. Large caps added 0.4% (+10.9% YTD), while mid-caps fared even better, rising 0.9% (+11.8% YTD). Mid-caps are more domestically focused than their larger siblings, so their outperformance is a further nod to the ‘do-no-harm’ Budget theory. So too the performance of sterling, which was unchanged at US$1.34, and the 10-year gilt yield which fell eight basis points to 5.28% (up 81 basis points YTD).

Europe ex UK:

The MSCI Europe ex-UK Index was this week’s star performer courtesy of a 2% gain (+10.7% YTD). The European Central Bank’s unanimous decision to hold rates plus stronger-than-expected eurozone GDP growth—the economy expanded 0.4% on a quarter-on-quarter basis, double expectations of 0.2%—likely helped here. At the national level, German stocks finished 2.5% higher (+5.4% YTD), their French equivalents rose 2.4% (+0.7% YTD), as did Swiss large caps (+15.1% YTD), while Italian stocks tacked on +1.9% (+13.6% YTD). Like sterling, the euro was unchanged at US$1.12. Finally, the yield on the 10-year German bund ticked two basis points lower to 3.32% (up 47 basis points YTD).

Important information

Investors should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future returns. You may not recover what you invest.

This material is a marketing communication provided for information purposes only and does not constitute independent investment research. References to financial instruments are for general information purposes and are not subject to requirements applicable to independent investment research.

Any references to securities or financial instruments should not be regarded as a personal recommendation, or as an offer, solicitation or invitation to buy or sell any financial instruments. The views expressed are those of the authors at the time of publication and are subject to change. Past performance is not a reliable indicator of future results.

This material does not constitute tax, legal or accounting advice. You should seek independent professional advice appropriate to your individual circumstances before making any financial decision or engaging in any transaction.

To listen to all the past Weekly Comment podcasts click here or subscribe via the apps below: