The UK stock market may outperform its U.S. counterpart if the artificial intelligence-driven rally comes to an end, according to new analysis from Capital Markets. The research argues that the FTSE 100 is structurally better positioned than many global equity indices to withstand a sharp correction in AI-related stocks.
Recent market performance appears to support that view. While U.S. technology shares have come under pressure, the FTSE 100 has remained comparatively resilient, holding up during heightened geopolitical tensions in the Middle East despite missing much of the technology-led rally that began in late March.
The FTSE 100 has gained 9.21% so far this year and is up roughly 2% over the past month. By comparison, the Nasdaq 100 has advanced 12.17% year-to-date but has fallen 3.6% over the past month.
Lower Technology Exposure Offers Protection
“If the AI-fueled stock market bubble is bursting, we believe the UK stock market will hold up better than most of its peers, unlike the post-dotcom crash,” said Joe Maher, the firm’s senior market economist.
According to Capital Markets, today’s market differs significantly from the dotcom era.
Although UK equities fell around 40% in U.S. dollar terms during the technology crash of the early 2000s—compared with roughly 50% for U.S. equities—the composition of the UK market has changed substantially.
Technology, IT and communication services companies represented around 30% of the MSCI UK Index during the dotcom boom. Today, those sectors account for only about 3%.
“As a result, the tech sell-off at the time weighed heavily on the UK equity market, while its minimal tech exposure and defensive composition should now put it in a good position,” Maher said.
Economic Outlook Seen as More Supportive
Capital Markets also believes the broader economic backdrop is likely to be more favourable than it was during the early 2000s.
The dotcom collapse coincided with a U.S. recession, amplifying the decline in global equity markets. This time, the firm expects the U.S. economy to remain comparatively resilient even if AI-related valuations come under pressure.
That resilience, it argues, should “limit the downside in global stock markets,” including the UK.
Weaker Dollar Could Benefit UK Assets
The report also suggests that an unwinding of the AI trade could weaken the U.S. dollar.
“If the AI boom turns into a bust, we expect a shift toward monetary easing by the Fed and a slowdown in capital flows to the US to cause a general weakening of the dollar, including against the pound,” Maher said.
He added that the firm nevertheless remains bearish on sterling over the longer term because it expects the Bank of England to lower interest rates next year.
Defensive Sectors Continue to Provide Support
Capital Markets noted that the FTSE 100 has also benefited from its sector composition during recent geopolitical tensions.
Energy companies have been supported by higher oil prices, while financial stocks have gained from elevated market volatility.
However, the firm believes those tailwinds could fade over time and continues to expect the AI investment boom to reverse over the next year, adding that “it is possible that this process is already underway.”