Companies are betting on AI, but can the boom last?

In our latest monthly market update video, our Chief Investment Officer Richard Flax looks back at market performance in August and explores future scenarios for Artificial Intelligence. You can also find a written version of his commentary below.

On the surface, August looked pretty quiet. ETFs for global bonds and global equities (measured in sterling) were basically flat for the month, after global equities had rallied quite nicely in July.

Beneath the headlines, there was quite a lot going on. In terms of interest rate policies, the US central bank had left rates unchanged at their last meeting at the end of July, in the face of pressure from the Trump administration calling for rates to come down. At that point, investors seemed to think that it was a toss-up whether or not the Federal Reserve (Fed) would cut rates in September.

By the end of August, however, opinions had shifted – and the market is now confident that rates will come down at the next meeting in a few weeks time. So what changed? There are a couple of points to make. First, we saw data from the US labour market that suggested the outlook for jobs wasn’t as strong as initially thought. Second, the Chairman of the Fed, Jay Powell, indicated that he thought rates could come down in the near future.

At the same time, the inflation picture in the US isn’t completely clear. Annual inflation is still higher than the Central bank would like, albeit not too far away. The good news is that we haven’t seen much of an impact from higher tariffs on goods inflation. The less good news is that services inflation is still pretty sticky. The Federal Reserve will probably cut its policy rate in September, but it’s not clear how many more rate cuts it will manage, especially if inflation does pick up a bit from here.

Artificial Intelligence (AI) has remained a key focus of attention, particularly with the launch of ChatGPT 5 in early August. In general, the feedback on the latest iteration of ChatGPT was a bit disappointing. That left investors wondering if we’ll see a slower pace of improvement in the performance of these models going forward and what could that mean for adoption of AI models and tools across the world. On a similar note, we also saw the latest earnings release from Nvidia in August, which showed a very strong financial performance in absolute terms, but maybe just slightly disappointing compared to some investors expectations.

Finally, there’s been continued focus on UK public finances ahead of the budget announcement – likely in late November – and that’s prompted bond yields to rise. The government faces a challenging situation, with anaemic growth, high levels of taxation and a budget deficit. The chancellor has committed to not raising income tax or VAT, which gives her with less room to manoeuvre. This leaves the government with a delicate balancing act: how to improve the fiscal accounts without upsetting voters or investors. It won’t be an easy problem to solve. 

Question for the month

What’s the outlook for Artificial Intelligence?

It feels like we’ve been discussing AI for a long time now, but we think we’ll be talking about it for some time to come. The short answer is that we think the outlook is positive. We think AI will have a significant impact on how businesses and society operates in the coming years and that will create opportunities in financial markets.

We need to look at this through a couple of different lenses. First, the likely impact of AI, and second, how it will translate into financial asset prices.

On the first point, the amount of spending that’s being allocated to AI, often focused on building data centres, is remarkable, measured in the trillions of dollars. Virtually every company seems to have an AI strategy, trying to find ways of ultimately doing more with less. And it’s probably still too early to say how big an impact all those projects will have. 

Then there’s the question of how it’ll translate into financial asset prices, like equities. As usual, there’ll be winners and losers. Often it can be new businesses that emerge victorious – think Amazon versus Barnes and Noble. But the incumbent large tech businesses are clearly spending aggressively to make sure they emerge among the winners.

In terms of timing, usually investors get very excited about the opportunities that a new technology can provide. In the long term, that’s often correct, but sometimes they can be too optimistic about the timing. So, AI has created a lot of excitement around its potential to drive innovation and productivity, and that should be positive for at least some financial assets going forward. But we do need to be mindful that investors don’t get too excited too quickly.