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WeekWatch
Stock Take
At peak stock market bubble in Japan in the 1980s, the Imperial Palace in Tokyo was said to be worth more than all the real estate in California. Perhaps not surprisingly, that asset bubble burst when the Bank of Japan tightened monetary policy (raised interest rates).
Now the situation has somewhat reversed. In the MSCI All Country World Index (ACWI), just one company, Nvidia, makes up over 5% of the overall index. In comparison, Japan (one of the largest economies in the world), makes up just 4.89% of the index. Nvidia’s rapid rise in value has accompanied increasing optimism around the power of AI – which generally relies on Nvidia chips. This optimism has lifted the overall S&P 500 over recent years.
According to Carlota Estragues Lopez, Equity Strategist at SJP, the S&P 500 has risen dramatically since AI technologies started to be a dominant theme in markets in October 2023. She notes: “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.”
Not a dotcom repeat
Recently there has been an increasing awareness around the levels of investment needed to compete in the AI race. Microsoft reported capital expenditure was up some 50% to US$16.8 billion in the third quarter, while Meta raised its 2025 guidance for capital expenditure to between US$70 billion and US$72 billion, for example.
Figures like these may spark concern. Many investors will have the dotcom bubble from the turn of the millennium seared into their memories. Others will be remembering the subprime mortgage bubble in the US 20 years ago.
As a result of increasing investor nerves, markets have been struggling in recent weeks.
Yet there are differences between today and other recent bubbles. One such difference is that today’s big players are profitable. For example, Microsoft reported Q4 operating income of US$34.3 billion (up 23% compared to the same period last year) in its latest results.
Carlota 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.”
Nevertheless, investors kept a close eye on Nvidia’s results last week, looking to these as a key indicator on the health of the tech sector.
Ultimately, when Nvidia posted its results, they results beat expectations. Still, they weren’t enough to totally lift fears over a bubble.
That one company could have such an impact on markets may be a warning over the dangers of concentrated portfolios. “The key takeaway from the past week should be that diversification is more important than ever,” adds Carlota.
When data carries less weight than usual
Turning to the UK, last week saw the Office for National Statistics reveal that UK inflation had fallen to 3.6% in October.
While still notably above the Bank of England’s 2% target, it represented the first drop since March this year. Services inflation, which has proven particularly “sticky”, was down from 4.9% to 4.6%.
While the falling inflation rate has added to hopes the Bank of England will cut interest rates next month, much will depend on what is announced in Wednesday’s Autumn Budget. Uncertainty around the Budget already contributed to a slowdown in consumer spending in October. Economists had expected spending to at least remain flat or possibly grow.
Japanese spending
Outside of Europe, Japanese government bond yields rose notably last week. The Asian economy appears to be facing a number of challenges. The AI wobble in the US had a knock-on impact across the globe. Meanwhile tensions rose between Japan and China after Japanese Premier Sanae Takaichi said a Chinese invasion of Taiwan could trigger a military response from Japan.
Finally, Japanese markets reacted to a large stimulus bill to try and spur growth.
According to Martin Hennecke, Head of Asia & Middle East Investment Advisory & Comms at SJP, the sharp rise in Japanese bond yields this week coupled with AI valuation concerns may serve as a good reminder of the importance of diversification.
He adds: “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
Savers are set to benefit from increased protection on their cash deposits and savings with effect from next week.
The Financial Services Compensation Scheme (FSCS) has increased the deposit protection limit to £120,000, up from £85,000 previously, from 1 December. The decision means that if a bank or building society fails, individual savers will have up to £120,000 of their deposit protected, per institution. The protection will rise to £240,000 for joint savings accounts (£120,000 per person).
There has also been an uplift in the amount protected under so-called ‘temporary high balances’ – such as those from the sale of property or an insurance payout. This will rise from £1 million to £1.4 million for six months.
With the Autumn Budget now just days away, many will be waiting anxiously to see just how hard the axe falls and where. Last week saw reports working pensioners could face higher taxes, while owners of electric vehicles could see new charges introduced. Property taxes of some sort have been speculated on, yet until Chancellor Rachel Reeves stands up at the dispatch box, nothing can be certain.
In order to provide clients with more information, on Budget Day we will be posting a concise overview of the chancellor's key announcements as well as the macro economic implications. We will also provide detailed content on the different aspects of the 2025 Autumn Budget in the days following, looking at what it could mean for different people, from business owners to pensioners to working families.
Please do get in touch if you have any questions following the Budget.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
In The Picture
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SJP Approved 24/11/2025
