WeekWatch

AI market wobbles

The start of a market rotation, or another temporary blip for chip makers? After AI-related companies suffered notable share price drops last week, this is the question investors will be asking.

After posting huge gains for much of 2025 and 2026, while seemingly overcoming the concerns about higher energy prices caused by the Iran conflict, Samsung and TSMC have faltered in recent weeks. Both companies’ share prices fell further last week.  On Thursday, TSMC reported record third quarter profits that were up 69% on the same quarter last year. Yet, despite better-than-expected results and an upgraded outlook, the company’s share price dropped more than 7%. Samsung dropped almost 15% over the course of five days – leaving it down over 30% from its mid-June peak.

Several issues are contributing to the current sell-offs. Part of it will no doubt be profit taking. Even after the recent falls, many of these companies’ share prices are still substantially higher year-to-date. 

At the same time, news stories have backed concerns around how sustainable the recent AI investment cycle will be. Australian data centre operator Firmus paused its US$30 billion initial public offer (IPO). Days later, compatriot data centre operator AirTrunk delayed its own planned IPO of a real estate investment trust (REIT), blaming market conditions. 

Similarly, questions about the sustainability of spending on AI refuse to go away. Over the weekend, news emerged that Anthropic had offered alternative asset manager Blackstone double-digit yields on a US$60 billion AI chip deal. Reports have been emerging over concerns around so-called ‘neocloud’ companies (specialised cloud providers, focused on serving AI), such as CoreWeave. Many of these have taken on huge borrowings in a quest for expansion. With interest rates rising, more questions are being asked over whether these neoclouds can make a profit while still paying back their loans.  

On Tuesday, Broadcom chief executive Hock Tan compared many investors to gamblers in a casino with their AI bets. Facebook owner Meta is due to deliver its results on Wednesday, the first of the Magnificent 7 to do so this quarter. Given the recent uncertainty, these results – and specifically any stated spending plans, will be watched closely by investors as a litmus test for the wider industry. 

US Inflation picks up

The recent AI sell-offs might also be a sign that markets are finally paying some attention to growing inflationary pressures. 

US inflation numbers, based on its consumer price index, showed prices rose 3.7% in September. This was above both expectations (3.6%) and the number recorded in August (3.4%). Unsurprisingly, energy costs were the biggest driver. Gasoline prices were up 9.1% month-on-month and 34% over the past year. Core inflation, which doesn’t include food or energy prices, still rose from 2.4% to 2.6%.

As inflation creeps up, this increases the chances that interest rates will rise.

Traditionally, such information would have also been bad news for US Treasuries. They have come under intense pressure in recent months. But while there was a temporary yield spike when the inflation news was announced, on this occasion yields ended the week lower, as investors sought traditional sanctuaries in the face of AI volatility. 

Has the UK turned a corner?

With the Budget due next week, Chancellor John Healey will have been encouraged by the news that UK GDP grew 0.1% in August. Given the recent energy shocks, economists had been expecting the economy to shrink.

Computer programming grew by double digits, suggesting the AI build-out is having a positive effect on the UK economy. 

The news capped a good week for economic data. The International Monetary Fund (IMF) has recently upgraded its growth forecast for the UK economy to 1.3% for 2026. This compared to its April prediction of 0.8%. The organisation was particularly complimentary of the country’s attempts to narrow the deficit, and urged Healey to ‘stay the course’. 

However, energy prices remain a cloud on the horizon. The wars in Ukraine and Iran show little signs of ending soon. Brent crude oil spent most of last week hovering between $103 and $105 a barrel, however on Friday it leapt to almost $110. 

For Healey contemplating his inaugural Budget next week, rising energy costs present an unwanted headache. 

Government poised to increase bank taxes in Autumn Budget

Chancellor John Healey is widely expected to increase taxes on UK banks in the Autumn Budget as the government seeks to raise revenues to cope with rising costs.

According to news reports, the chancellor is considering a range of options to help fund support for poorer households and businesses facing higher energy costs this winter.

Possible measures include reversing part of the reduction in the bank surcharge, which was cut from 8% to 3% in 2023. Alternatively, Healey could opt to introduce a one-off windfall tax.

This is one of the few potential measures to have been leaked ahead of the Budget, which will take place on 28 October.

Given the state of the public finances and broader macroeconomic conditions, the chancellor is likely to face some decisions in the Budget.

The impact of inflation is central to the government’s plans. It has failed to stabilise at the Bank of England’s inflation target of 2% (see In The Picture below). The US-Iran conflict has been driving energy prices higher, contributing to recent inflationary pressures.

To date there have been fewer pre-Budget announcements or rumours compared to previous years.

At the Labour Party conference in September, there were also hints of potential tax rises, although no further details were provided.

Prime minister Andy Burnham has already pledged to offer access to free social care services for everyone in England. To fund this, he said the government would replace the state pension triple lock with a ‘double lock’ in 2030. This would mean the state pension would increase annually by the higher of inflation or 2.5%, with the link to average earnings growth removed.

The government has also unveiled plans for a new first-time buyer scheme, aimed at making it easier for people to get onto the property ladder. The scheme would offer government-backed equity loans of up to 20% to buyers of new-build properties who can provide a deposit of at least 2.5%.