Investment Viewpoint: AI disruption produces modest market moves

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Markets and macro insights with Bernard Swords, Chief Investment Officer

What happened in markets last week?

• Global equity markets showed a slightly weaker performance during last week, with the FTSE All World Index slipping by 0.3% in euro terms. While headline index moves were modest, there was notable volatility beneath the surface as investors continued to focus on the potential impact of AI-driven disruption across a wide range of industries. The pressure remained most visible in parts of the “new economy”, with communication services and technology shares softening (technology only marginally, software more so); but concerns broadened to affect more traditional sectors as well. Transport logistics companies came under strain, as well as financial services firms, particularly investment banks, financial advisers, and asset and wealth managers. The common theme was the fear that new AI-enabled competitors could erode the market position, or indeed undermine the viability of established players.

Will AI-driven disruption continue?

• We expect these AI-related worries to persist and rotate through sectors. However, we believe the pace of disruption implied by some recent share price moves is likely overstated. In most instances, the adoption of new technologies is more likely to be evolutionary rather than revolutionary. At the same time, the cost of technology investment is likely to favour larger companies over smaller competitors. Large incumbent firms have the capability, scale and resources to implement these tools themselves, helping them maintain their competitive positions. One broader implication is increased deflationary pressure across industries, as productivity gains are ultimately passed on to consumers.
• While sector specific volatility may continue, this does not necessarily imply downward pressure on overall market indices. For that, the bigger drivers remain global economic condition, particularly growth, interest rates, and inflation. On that front, last week’s macroeconomic news was generally benign and centred on the United States. Nonfarm payrolls were a clear highlight, coming in more than 70,000 above expectations, while the unemployment rate edged down by 0.1%. The household survey suggested an even stronger labour market, showing an increase of over 500,000 jobs, although this figure is likely to be revised lower. Nonetheless, it supports the view that the labour market may be stabilising.

What else can we conclude from last week’s data?

US retail sales for December were flat, pointing to a moderation in consumption growth from roughly 3% earlier in the quarter to about 2.5%. Although slower, this still represents a reasonable pace of expansion. Inflation data also offered a positive note, with core CPI easing from 2.6% year-on-year to 2.5%. While still above the Federal Reserve’s target, the decline is notable given the upward pressure from tariffs, suggesting the recent shift in US tariff policy is not yet generating an inflation problem.

The week ahead: what to watch out for

Looking ahead, attention will turn toward European data in the coming week, including industrial production and consumer sentiment. From the US, the key release will be the fourth quarter GDP figures on Friday, alongside the minutes from the latest Federal Reserve meeting. There is also the possibility of a US Supreme Court ruling relating to US tariffs.