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The U.K. stock market could prove more resilient than many global peers if the artificial intelligence (AI) investment boom reverses, according to Capital Economics, which argues that the FTSE 100 is better positioned than tech-heavy markets to withstand a potential AI-driven correction.
The research note comes as U.S. technology stocks face renewed selling pressure. While the Nasdaq 100 remains up 12.17% year-to-date, it has fallen about 3.6% over the past month. By comparison, the FTSE 100 has gained 9.21% this year and added roughly 2% over the same monthly period, supported by its defensive sector mix.
Capital Economics Markets Economist Joe Maher said the U.K. market should fare better than it did during the dot-com crash because its exposure to technology stocks is now significantly lower. Before the 2000 tech collapse, information technology and communication services accounted for roughly 30% of the MSCI UK Index. Today, those sectors represent only about 3%, reducing the potential impact of a sharp AI-related selloff.
Maher noted that the MSCI UK Index dropped around 40% from its March 2000 peak during the dot-com crash, compared with a roughly 50% decline in the MSCI USA Index. This time, however, the firm's analysts believe the U.K.'s limited technology weighting and defensive composition should help cushion losses.
Capital Economics also expects the global economy to remain more resilient than during the early 2000s. Unlike the dot-com era, when the U.S. entered recession, the firm believes the U.S. economy is likely to avoid a major downturn, helping limit broader declines in global equity markets.
Another factor supporting the U.K. outlook is the potential for a weaker U.S. dollar if the AI boom fades. Capital Economics expects Federal Reserve easing and weaker capital inflows into U.S. assets to pressure the dollar, although it remains bearish on the British pound over the longer term because it expects the Bank of England to cut interest rates next year.
The firm cautioned that some of the FTSE 100's recent outperformance, driven by gains in energy and financial stocks amid Middle East tensions and market volatility, may fade. Still, Capital Economics believes an AI bubble correction could already be underway, with the U.K. stock market remaining one of the better-positioned major equity markets if the trend continues.
