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July saw a real shift in investors’ focus across equity markets and regions. The month was marked by a sharp sell-off in technology and AI-related stocks. The sell off begun in Asian where semiconductor stocks tumbled over rising concerns about competition and the potential impact soaring RAM prices might have on the appetite for AI. Chinese firm, Moonshot AI, unveiled new models that narrow the performance gap with US systems at significantly lower costs. According to OpenRouter, Chinese models made up 46% of all token usage by US companies at the start of July, raising further question marks over the long-term prospects for American LLMs and the investments being made by big tech.

Investors have begun to question whether the capital expenditure that has been poured into this area of the market will ultimately pay off in terms of the revenue it is expected to generate. We’re starting to see hyperscalers move from being highly free cash flow positive to free cash flow negative as a result of continued and substantial investment in AI infrastructure. Research by Japanese finance newspaper, Nikkei Asia, also found that Meta, Oracle, Amazon, Microsoft and Alphabet have a combined $1.65tn in AI investment debt that they’ve been keeping off their official balance sheets. While technically not illegal, the worrying trend means these debts surpass their official balance sheet debts of $1.35tn. All of this meant that during the month, growth-oriented areas of the market sold off, while more traditional sectors such as financials and energy delivered strong returns as investors rotated into these areas.

The general shift in investors’ sentiment away from technology and AI benefited the UK market, which has greater exposure to traditional sectors such as banks, energy, mining and tobacco. The UK index delivered a positive return of 3.3%, while the US market declined by 1.6%. Other factors also contributed to market movements during the month, including the re-escalation of tensions between the US and Iran and investor uncertainty stemming from the lack of forward guidance from the Federal Reserve. Interest rates were kept on hold in the US, but this did not prevent bond yields from rising, with implications for long-term borrowing costs. Against the backdrop of concerns surrounding AI and technology stocks, Asian and Emerging Markets posted negative returns, while Europe and Japan were broadly flat. Across most regional equity markets, both at the sector and individual stock level, the month was characterised by a high degree of price volatility.