Are AI stocks still an intelligent investment?
Risk premia have tightened since June. That's the Bank of England's Financial Policy Committee view-and it thinks equity valuations look stretched on several measures, especially in AI-focused tech. Combine that with rising index concentration and you have a market that's vulnerable if AI optimism cools.
The top five S&P 500 companies now make up almost 30% of the index, the highest since the mid-1980s. The comparison to late-90s dynamics isn't perfect, but the echoes are there: sharp multiple expansion, speculative flows, and forms of circular financing. The difference today: more proven business models and deeper-pocketed backers.
AI valuations are riding on future adoption. Amara's law still has believers: overhyped in the short run, underestimated in the long run. Yet the path isn't clean-competition could compress margins, power and water constraints may slow build-outs, and new delivery models could make some expected infrastructure spend unnecessary. Still, there will be winners.
One useful data point: a recent note highlighted AI-related capex as a bigger contributor to US GDP growth in September than consumer spending. That's a powerful tailwind-but it also raises the bar for execution and capital efficiency.
Portfolio implications
- Valuation discipline: Separate infrastructure enablers, model providers, and application layers. Price each on unit economics and switching costs, not headlines.
- Concentration risk: Stress test cap-weight exposure. Consider equal-weight sleeves, factor tilts, or defined hedges around mega-cap clusters.
- Bottlenecks: Track power, water, and data center constraints. These can cap revenue realization even with strong demand.
- Tech risk: Model scenarios where inference efficiency improves faster than expected, reducing infrastructure intensity.
- Procurement dynamics: Watch vendor financing and customer concentration. Easy money props up demand until it doesn't.
AI tools for finance: practical resources
24-hour party people: the rise of near-round-the-clock equity trading
US equities are edging closer to all-day access. 24X National Exchange now runs from 4am to 8pm ET and aims for 23-hour weekdays next year. NYSE, Nasdaq, and CBOE plan extended hours, and the NSCC intends to expand clearing windows by Q2 2026. In the UK, IG opened 24/5 trading on 110 popular US names.
The pitch is simple: better access for global investors and more flexibility for institutions that can't use alternative venues. But the economics and risk controls need to match the hours.
- Liquidity reality: Overnight volumes are thin. Expect wider spreads, more slippage, and partial fills. Size positions accordingly.
- Volatility profile: Low-liquidity tape means exaggerated moves around headlines. Good for price discovery at times, but noisy for valuation signals.
- Execution hygiene: Use limit orders, refresh logic, and smarter IOC settings. Audit algo behavior by session to avoid off-hours drift.
- Operational load: Decide whether to opt in. If yes, align staffing, surveillance, credit limits, and client disclosures with the extended window.
- Collateral and margin: Reassess intraday/overnight frameworks as clearing hours change.
NSCC extended hours announcement
Think twice before taking credit
Tension between the UK government and the Bank of England is showing up in private credit. Recent high-profile auto sector defaults in the US underscore the usual suspects: leverage, underwriting quality, opacity, and complex structures. The BoE is running a simulation to map connections between private credit and the wider system.
Meanwhile, the UK Chancellor wants broader access via long-term asset funds, and has secured a commitment from major pension providers: £50bn over five years-at least 10% of DC default funds-into private investments, including private credit. The goal is to lift returns and support the economy.
Growth in private markets is set to outpace public assets, but it won't be smooth. Some managers view current conditions as unattractive while rates stay high. A rate cut before the next budget would help, though monetary and fiscal priorities remain out of sync.
Risk and allocation checks
- Underwriting and covenants: Scrutinize loss assumptions, recovery paths, and sponsor behavior under stress. Avoid complacency from recent benign vintages.
- Structure and opacity: Map intermediation layers, side pockets, and NAV financing. Know where valuation lag can mask drawdowns.
- Liquidity terms: Match lockups and gates to liquidity needs for DC default funds. Model disorderly redemptions.
- Rate path sensitivity: Run scenarios for higher-for-longer vs. incremental cuts. Reprice risk premia and refi risk accordingly.
- Systemic connections: Track overlaps with banks, insurers, and CLOs. Correlations tend to jump when funding tightens.
Bank of England Financial Stability Report
Bottom line for finance pros
- AI equities: Stay invested with a plan. Trim concentration, price execution risk into models, and focus on cash generation over narrative.
- Extended trading: Treat off-hours access as a feature, not a mandate. Only offer it where liquidity, controls, and client needs justify the cost.
- Private credit: Don't chase yield without clarity on structure, liquidity, and refi risk. Ensure DC default exposure aligns with genuine long-term capital.
Your membership also unlocks:
