What’s driving global stock markets? AI, tech valuations, and US growth

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[0:11] Emma Wall: Welcome to Switch Your Money On from Hargreaves Lansdown, with me, Emma Wall – Chief Investment Strategist.

[0:16] Sarah Coles: And me, Sarah Coles – Head of Personal Finance.

[0:19] Emma Wall: So, this is your Investment Special. Next week will be the Personal Finance update – but, for now, lots to talk about: what’s happening with the tech giants, the impact of AI, some interesting figures out of the US, question marks over what the Federal Reserve will do next, and the US shutdown lingers on – at the time of recording, anyway.

[0:39] Sarah Coles: Yes – I mean, you’re not kidding – there’s loads to talk about. But I guess we should talk about the thing that is on everybody’s lips, which is AI. So, what’s actually going on with AI at the moment?

[0:46] Emma Wall: Well, there seems to be a new AI story every week – but, at the moment, what people are talking about is valuations. That is the fact that AI stocks have done incredibly well – not just this year, but really over the last five years – and it’s really driven a lot of our performance in the market. But these valuations are starting to get what we call ‘Toppy’ – and Andrew Bailey – who’s the Bank of England Governor – has actually warned over tech valuations.

So, he is concerned with the mismatch for the possible outlook for global growth – which looks weaker – and the fact that valuations of technology companies are very high. So, these are growth-style companies, which tend to do better in an economy that is expanding – and he’s juxtaposing that with the fact that these economies look like they are slowing down.

So, he’s written to his counterparts – the G20 – warning about what he calls, ‘A disorderly adjustment’ – and there’ve been similar warnings from the IMF – and, indeed, from bankers in Wall Street as well.

[1:37] Sarah Coles: Obviously, ‘Disorderly adjustment’ is a lovely euphemism. Can you translate that to people who maybe aren’t familiar with Andrew-Bailey talk?

[1:44] Emma Wall: Yeah – so, as I said, valuations do look stretched for tech companies. So, what do I mean by that?

So, ultimately, a valuation is thinking, ‘Does the price on the stock market, right now, reflect the underlying value of the company?’ – and the logical answer would be like, ‘Yes, why wouldn’t it?’ – and it’s because of momentum and sentiment.

You get what we like to call ‘Animal spirits’ in markets, sometimes, which means they get really excited about the prospects for companies – and, sometimes, this is based on fact – and, sometimes, this is based on hope – or, indeed, momentum or trajectory... that is, a company has been doing really well up until this point, so I am going to assume that it’s gonna continue to do well.

Well, we know that’s not always the case – markets can go down as well as up, and past performance is no guarantee of future returns – the classic investment adage. And they think there’s a disconnect here between the fact that these companies have done very well – it has been a booming industry. There is an incredible amount of CapEx – or capital expenditure – that’s been promised – but, really, actually, the underlying value of the companies is not quite where the Lofty valuations are, currently.

[2:49] Sarah Coles: And, I suppose, people will be wondering what to do in this sort of environment. I mean, presumably, the same investment strategies hold true in any environment?

[2:58] Emma Wall: Yeah – I mean, one of the things we’d say is you should always be wary of concentration – and concentration comes in your portfolio in two ways. It can either be because a particular area in your portfolio has done really well and, therefore, its valuation has grown – and, therefore, the proportion of those stocks or that particular sector versus other things in your portfolio is just bigger – and you are no longer a balanced portfolio. Or it could be that you’ve bought too much into a particular sector and you have this sort of concentration in stocks – and that has happened because people have been so excited about these stocks, people have been continuing to buy them as valuations have been growing.

So, we’d say – regardless of the sector we’re talking about – always be wary of over-concentration: over-concentration in particular stocks, over-concentration in particular sectors, or even in particular geographies. So, diversification is key here – now might be a good time to take gains from areas that have done well, and spread those gains around into other areas, so you can rebalance your portfolio.

We do continue to think that AI will be a considerable driver of not just stock markets, but also the economy on a long-term basis – but, just at the moment, valuations are potentially toppy and, therefore, it could be a good time to rebalance – because you will have, on the whole... you know, if you’ve bought at any point in the last five years, the likelihood is that you’ve done well from these stocks and you could, therefore, crystalise some gains.

[4:19] Sarah Coles: So, you mentioned the long-term there. I guess that’s the other part of the puzzle, isn’t it, really – the approach when you’re investing is about the long-term, not the short-term movements?

[4:27] Emma Wall: Absolutely. Investments can fall as well as rise – as we often talk about – so concentrating on the long-term, and trying to ignore some of the volatility in the market... difficult as it is, at times – is really important.

[4:38] Sarah Coles: We’ve talked quite a lot about evaluation, so we always need to say that past performance isn’t a guide to the future.

But we talk about AI as a threat – so seem to sound a lot like a threat – but, obviously, it’s a hugely positive factor as well, isn’t it?

[4:49] Emma Wall: Yeah – I mean, we’re talking about the AI revolution a lot – comparing it to something like the Industrial Revolution – or digitalisation, or electrification – and I think some of those comparisons are really fair. You know, you get these moments in history, where the invention of something – be that electricity... you know, industry really moves the needle – not just for those companies, they’re at the forefront of that innovation – but, really, for the whole world – at the risk of sounding rather superlative. And that’s because AI will enable all of us to be considerably more productive.

There are a lot of unknowns out there – and, dare I say it, there’s some fear around AI as well – but, ultimately... you know, sometimes, you get these revolutions that come along that impact the entire stock market, but also our daily lives – and makes them easier, more productive, and more efficient. And, because of that... you know, AI is actually – on some calculations – shown to have really boosted US GDP over the past year – and that’s one of the positives that we’ve seen from AI.

[5:50] Sarah Coles: Yes – and, obviously, when you’re looking at productivity and growth, it’s something that the markets have really been looking for. The official GDP numbers, themselves, from the US... they’re not looking so bad, are they?

[6:01] Emma Wall: No – but this is one of the things. We’ve had a couple of economists – so those from Oxford Economics – and, indeed, the large banks – Goldman Sachs – has estimated that US GDP has been boosted by AI innovation by $160bn. And this is really interesting – particularly as we’re trying to understand what’s going in the US economy – because you have... and maybe we’ll come onto this in a bit when we’re talking about the Fed – and what to expect there.

There have been some signs of weakness in the US economy and the jobs data has been a bit worrying - inflation has been stickier than we would have expected. But, actually, this hasn’t just come through in US GDP figures in the way we might expect. The difference there – the ‘Delta,’ as they call it... you know, ‘What’s making up that gap?’ Well, they’re saying a lot of it may be down to AI innovation.

So, Oxford Economics has predicted that, actually, that’s why you’re seeing such healthy GDP figures, despite some underlying negative economic data is because of AI – and Goldman Sachs, as I say, credits AI with $160bn-worth of US GDP.

[7:01] Sarah Coles: One of the things I think’s been really interesting is the revision of the GDP figures. So, the second quarter was actually revised up quite substantially – so to 3.8%, when it had originally been reported at 3%.Now, obviously, the third quarter’s due next month – and the estimates are putting it round about 3.3%. So, I guess those are robust-enough figures.

You mentioned the Federal Reserve – what’s the concern there?

[7:21] Emma Wall: So, yeah – really interesting. Sometimes, the predictions of these figures were very much pushed down by tariffs, so it could be just a recalibration of the impact of tariffs, or not – and also, as we’ve said, the boost from AI. But what I think is really interesting is... normally, when you see a robust, health economy, 3.8% is very much in the robust, healthy-economy bucket... you know, we’d love to have that kind of growth over here in the UK. You’d think, ‘Okay – well, what would you expect a central bank to be doing?’ Well, you’d expect a central bank to be raising rates, maybe, in a healthy economy – or, at least keeping rates where they are – because, really, you cut rates in order to boost economic growth.

You see, it’s a lever that central banks have in order to support the economy, independent of politics – but, actually, what the Federal Reserve is doing, potentially, is cutting interest rates. If you look at both the political pressure they’re under – but also, if you look at the yield curve – and what the markets are expecting Federal Reserve to do – and also, you listen to what the Federal Reserve bankers are saying – and, ‘Why is that?’ – it’s because they’re really focused on a single datapoint.

So, instead of reading everything we’ve been talking about – about the fact that AI is boosting GDP... Instead of looking at the GDP figures, themselves, they are almost, singularly obsessed with jobs data – and jobs data is looking weaker – and, therefore, we expect the Federal Reserve to continue to cut over the next 12 months despite some of this robustness in the economy.

[8:50] Sarah Coles: So, what happens when you have this robust economy and, yet, the Fed cuts rates?

[8:54] Emma Wall: Really interesting question – and this is what makes us, in my team – us team of analysts – really nervous. And that is because, what can happen when you have a really healthy economy – and you, basically, boost it even further – because that’s what rate cuts does – you can have what’s called an economy that’s running ‘Too hot’ – in the kind of Americanisation of language. And that means that, when an economy is running too hot, you think, ‘Oh, that’s great, isn’t it?’ You know, you get all this growth – you get consumer spending – yes – but you also then get inflation. And then, the Fed may be forced to do a complete ‘180’ and fast – in order to get inflation under control – because inflation has a very damaging impact on consumer spending, consumer health – and it’s very much consumers that help drive the US economy because of rising prices... obviously, impacts. We had that, very much, in the UK – didn’t we? – with the cost-of-living crisis. And so, having this swift ‘180’ from a rate-cutting environment to a rate-rising environment is very bad for equity markets – and it’s pretty bad for bond markets as well. And that is one of the things that we think could, potentially destabilise what has been a pretty healthy rally in the US – putting April and the tariff-temper-tantrums aside... you know, it has been a growing US stock market for a number of years – and, if we’re looking ahead to what could, potentially, destabilise and knock this rally off course – particularly with... as we were talking about at the top of the programme, these kind of ‘Fluffy’ or ‘Toppy’ tech valuations – it could be an about-turn in Federal Reserve policy because of an overheating economy – and we’re watching that very carefully – and the potential impact that could have on stock and bond markets.

[10:33] Sarah Coles: And, presumably, this concern about what might happen is one of the things that’s really pushing that gold price higher?

[10:38] Emma Wall: It is very much – we’ve hit yet another all-time high since you and I last spoke. There’s a couple of things at play. The gold market is a safe haven – and the fact that you have got a reasonably unpredictable President in the United States means that some of the shine of the US dollar being a reserve currency for global central banks has tempered – if you will – and, instead, gold has been the preference for treasury stores.

You have global central banks buying gold at levels that we haven’t seen, historically – and so that’s a systemic boost or strategic boost to the gold price. Then, you have these tactical plays – and one of them is exactly that – the concerns about the valuations and the Federal Reserve policy in the US. And then, the third factor is the fact that the US shutdown rumbles on – and, actually, if that is resolved, we do expect that, potentially, the gold price could come off a bit – because that’s the tactical tailwind to the gold price – although, of course, there’s no guarantees with any of these asset classes – but we do think this general nervousness which is driving the flows into gold... a lot of it is linked around the uncertainty in the US: the uncertainty of the President, the uncertainty of Federal Reserve policy, and this potential for the disconnection.

[11:53] Sarah Coles: If the shutdown lingers – and, obviously, that’s a big ‘If’ – what sort of impact could that have on the markets?

[11:58] Emma Wall: So, if we look at what’s happened in the past... you know, the longer that a shutdown goes on, the more damaging it is for stock markets. Because, what happens in the short-term is, quite often, the stock markets are very efficient – and they look through what they think might be a temporary headwind – and they look beyond the next couple of weeks and think, ‘Well, actually, do all the things that were driving the market before the shutdown continue? – and, if so, let’s ignore what’s happening in the moment.’

If they think it’s something that will persist – and, in fact, ends up doing damage to the economy and the productivity of the economy – then you start to see markets react. And, typically, it is good for the gold price, bad for the US dollar, bad for equity markets, and bad for bond markets – because they expect, actually, rates to rise. So, that’s generally what you see as the shutdown goes on longer. If it is short-lived, often markets can look through the noise.

[12:48] Sarah Coles: So, there’s obviously gonna be a lot more to keep our eyes on in the coming weeks – if you’re not busy enough – and we will, of course, be back to discuss it in detail on the podcast!

But, before we go, there is time for our question of the week. I’ve been spoiled for choice in the history of AI, but one interesting experiment was in 1986, when an Artificial Neural Network was tasked with coming up with past tenses for English words. So, like ‘Sleep’ into ‘Slept’ – that sort of thing.

So, these were then fed to a program which nudged them towards better answers – so trying to look at how these iterations could improve – and they were, effectively, learning from their mistakes. But the English language is challenging enough that they defeated the computer once or twice – and they came up with some weird alternatives.

So, for example, the past tense of ‘Squat’ came out as ‘Squort.’ But what was the word that led them to come up with the past tense as ‘Membled?’

Was it ‘Mumble’ – was it [s.l. ‘Male’ 13:34] – or was it [s.l. ‘Mend?’ 13:35]?

[13:35] Emma Wall: I’m gonna go... I’ve no idea, Sarah! [Laughs]

[13:41] Sarah Coles: [Laughs]

[13:41] Emma Wall: So, what I’m gonna do is I’m gonna go for the middle one.

[13:45] Sarah Coles: Ah, it feels like you’ve cheated because you are completely right!

[13:47] Emma Wall: Hurray!

[13:48] Sarah Coles: I love the fact that ‘Male’ turned into ‘Membled.’ I mean, you know, I think, sometimes, we all feel a bit ‘Membled,’ to be fair!

So, before we go, we should say this was recorded on October 17^th 2025, and all information was correct at the time of recording.

[13:59] Emma Wall: Nothing in this podcast is personal advice – you should seek advice if you’re not sure what’s right for you. Investments rise and fall in value, so you could get back less than you invest – and past performance is not a guide to the future.

[14:12] Sarah Coles: Yes – this is not advice, or a recommendation to buy, sell, or hold any investment. No view is given on the present, or future value, or price of any investment – and investors should form their own view on any proposed investment.

So, all that’s left is for us to thank our Producer, Elizabeth Hotson.

[14:25] Emma Wall: And thank you to you so much for listening – we’ll be back again soon. Goodbye!

[14:29] Sarah Coles: Goodbye!