Market Snapshot is a weekly view from our portfolio managers, offering sharp, thematic insights into the trends shaping markets right now.
This week in numbers
The number of Baby Boomers retiring every day in the US.
The current dividend yield on the S&P 500.
Proportion of the S&P 500 total market cap made up by the Magnificent 7.
Past performance is not an indicator of future performance.
Quote of the week
“Any sudden shift of sentiment on whether AI will ‘work’ or not would be treated poorly by investors, and would likely lead to at least as large a drawdown as a deepening trade war with China.”
Steve Auth, Federated Hermes CIO, Equities, considers two potential sources of volatility in the year ahead.
This week’s Market Snapshot
Irrational exuberance Mk II?
Markets remained unruffled this week even as investors weighed the risk of an AI-induced market meltdown. But do the sceptics have a point?
- IMF and leading banks sound warning on AI market risk.
- Other cited risks include a deepening US/China trade war, unexpected Fed action and an extended US government shutdown.
- Collapse of First Brands and Tricolor Holdings offers credit markets pause for thought.
Investors this week pondered the risk of an AI-driven market meltdown. This followed a warning from International Monetary Fund (IMF) economist Pierre-Olivier Gourinchas of “a significant AI-related, tech-related investment surge”, which, he said, is creating echoes of the early 2000s dotcom boom.
Earlier in the week, the chief executives of Goldman Sachs, JPMorgan Chase and Citigroup also raised the prospect of financial markets entering bubble territory – even as their banks announced record results.
Nonetheless, markets remained largely unruffled. The S&P 500 declined slightly, falling 1.6% for the week to Thursday’s close. This was partly in response to the bankruptcies of two auto industry-related companies, First Brands and Tricolor Holdings, and fears of contagion in private credit markets. Treasuries rose, with the yield on the benchmark 10-year US bond falling to 3.967%, its lowest level since April.1
Figure 1: Forever blowing bubbles?
AI-related investment, real and forecast 2020-2030
The equity CIO’s view
Steve Auth, Federated Hermes CIO, Equities, highlights the bursting of an AI-driven bubble as one of six possible sources of future volatility for global markets. These include an extended US government shutdown, unexpected policy action from the US Federal Reserve, a US Supreme Court ruling against President Trump’s tariff programme, a deepening trade war with China and an earning seasons ‘wobble’.
On AI, Auth notes how much this sector has contributed to the market rally following April’s lows. “Any sudden shift of sentiment on whether AI will ‘work’ or not would be treated poorly by investors, and would likely lead to at least as large a drawdown as a deepening trade war with China,” he says. “Our own read from our teams’ dozens if not hundreds of company meetings across the economy is that a sudden shift here is unlikely. Too many really smart people have invested too many hundreds of billions of dollars to be utterly wrong on this call.”
In addition, says Auth, many companies are already achieving productivity gains from early AI innovation, across multiple sectors of the economy. “So any newsflow here, in our view, would be noise at worst and if the market reacts, a buying opportunity,” he says.
The global equity manager’s view
Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, notes how this year’s stock rally has been primarily sentiment driven, with fundamentals an afterthought. This is understandable, he says, since there are reasons to argue that this “this time it’s different”, not least how the rally has been led by established, well capitalised, mega-cap companies.
Even so, he adds, fundamentals and valuations can only be ignored for so long. “The IMF’s warning of a bubble will embolden those proclaiming a market top,” he says. “Such intense capital expenditure, with payoffs uncertain in terms of quantum and timeframe, leave the AI rally vulnerable to sudden shifts in risk appetite.”
He adds: “We remain bullish on the long-term investment case for AI, but with such a high concentration in the market we see attractive overlooked opportunities across the market that are more driven by the fundamentals. Whilst tariffs add uncertainty to growth, we believe that there are plenty of under-loved stocks set to benefit from a broadening out – watch out for US GDP growth, interest rate decisions, and earnings as catalysts. We also see opportunities in Europe as the industrial machine begins to turn, although, admittedly, that may take time to get into full swing and comes with its own set of potential challenges.”
1 Bloomberg as of 17 October 2025.
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