Update Equities: AI rally takes a breather

Equity markets will most likely end 2025 with positive returns, and with European and US equity markets closing the year with double-digit returns. However, this last full trading week sparked some scepticism about the AI-boom.

Equity markets faced some sharp volatility, as high-valuation technology stocks tumbled, dragging major indexes lower. This selloff was led by AI-linked names, including Nvidia, Broadcom, Oracle and Alphabet. The trigger was the growing scepticism over the sustainability of the AI boom. These concerns surfaced after Oracle’s financing hiccup for a Michigan datacentre. This immediately fuelled doubts about Oracle’s aggressive infrastructure spending. While AI remains the market’s defining theme, valuations are stretched and monetization lags the more than USD 400 billion annual capital-expenditure spending spree.

As tech stocks stumbled, investors started to rotate into sectors with better earnings visibility. The S&P 500 Equal Weight Index, for example, is currently outperforming its cap-weighted counterpart. This signals broader participation. Sectors, such as energy, health care, and consumer staples, attracted inflows as investors sought stability and value. This development seems to be a long overdue rotation, and not the start of a further market correction.

Despite this near-term volatility, strategists remain upbeat for 2026. The average analyst’s prediction for the S&P 500 Index, as surveyed by Bloomberg, is for a level of 7,555 by the end of 2026. This would imply an upside potential of close to 12%. And although market leadership is expanding, the long-term drivers behind big tech could continue to support major indexes – provided that AI investments start delivering meaningful returns. Ultimately, the AI trade looks to be more in a pause than a collapse. The ongoing rotation toward undervalued sectors signals a healthier, more balanced market as we move into 2026.