Is the AI sugar rush over? St. James’s Place on the question dominating markets this week

Carlota Estragues Lopez, equity strategist at St. James’s Place, examines whether the AI rally is running out of steam as software stocks fall and volatility returns, with heavy data centre spending and high US valuations pushing investors towards more reasonably priced developed markets, particularly Europe.

Carlota Estragues Lopez, equity strategist at St. James’s Place, said: “Is the AI sugar rush over? That is the question dominating markets this week as volatility resurfaced and software stocks sold off. Headlines that would have pushed shares to fresh highs during the peak of AI optimism are now being interpreted far more cautiously by investors.

“We saw this shift in sentiment clearly when Amazon fell 8% earlier this week after announcing plans to spend USD 200 bn this year on AI infrastructure. Several large tech firms also outlined further data centre investment. Investor nervousness around the AI trade, the monetisation of massive capex programmes, and stretched US valuations is evident in the S&P 500’s sharp swings: a 1.2% drop on Thursday followed by a rebound on Friday as dip buyers stepped in.

“It’s not just return on investment that worries investors, but also the risk of narrow market leadership that struggles to broaden beyond a handful of mega-cap names. Software companies, once viewed as prime AI beneficiaries, are increasingly seen as vulnerable to AI disruption. The MSCI World Software Index, a gauge for developed market software companies, is down 21% YTD, with nearly all constituents in negative territory, including several in Europe.

“In an environment where the market’s favourite trade is being questioned and uncertainty is driving volatility, our asset allocation is positioned to favour reasonably priced areas such as developed market equities outside the US. European stocks, in particular, have benefited from exposure to traditional value sectors, offering diversification as capital gradually rotates away from growth. Looking ahead, we see valuation tailwinds in Europe relative to the US and broader developed markets.”