The heat of July and the AI burn

Throughout July, as Europe battled heatwaves and wildfires, markets showed growing concern for those invested in AI's future.

The primary driver of markets in recent years has been AI. Specifically, the enormous spending from hyperscalers Amazon, Alphabet, Microsoft, Meta and Oracle, who plan to spend just shy of $725bn on AI infrastructure this year alone. That colossal figure is having a visible impact on US and global GDP. These companies have gone from the cash cows of global markets to net borrowers for the first time in recent memory, with profits taking a sharp and understandable hit as top-line growth remains healthy but capital expenditure soars. This was starkly illustrated when Alphabet registered its first-ever quarter of negative free cash flow since listing in 2004.

The companies attracting most attention this year haven't been the hyperscalers themselves, but the second-order beneficiaries of the spend, those involved in the infrastructure of the build-out. Two names stand out: Micron Technology in the US and SK Hynix in South Korea, both makers of the high bandwidth memory chips required by Nvidia. As the current choke point in the AI complex, both saw their valuations rise from around $100bn to a trillion dollars within just 12 months. Despite still trading on single-digit forward price to earnings multiples, that kind of price action tests even the most conviction-driven investors when sentiment shifts.

July delivered exactly that kind of shift. A confluence of events triggered a sell-off in major AI stocks: renewed US-Iran hostilities in the Gulf, the new Fed Chair Kevin Warsh signalling potential monetary tightening rather than the cuts most had anticipated, a new competitive Chinese LLM from Moonshot AI echoing the DeepSeek moment of 2025, and IBM's historic 25% single-day fall, its worst in 115 years, which pointed to money flowing away from legacy tech to fund AI spending. Micron dropped 39% from its late-June peak; SK Hynix more than halved in value. Both have since partially recovered but remain well below their highs. The question markets are asking: has spend gone too far, are we approaching peak capital expenditure in AI, and is the return on investment truly justified? Notably, the sell-off was localised within technology. The Nasdaq 100 fell 6.6% and South Korea's Kospi gave up 22%, while the S&P 500 was flat and the FTSE 100 gained 3.6%, a reminder that the broader market remains on a different footing.

Our direct exposure to this trade has been limited. Asian allocations in higher-risk portfolios were hit, though following an exceptionally strong run, Asian indices still lead year-to-date gains. In our Prima Adventurous and Balanced overlay funds, we exited our US Value ETF allocation, which had developed significant Micron exposure, in June and July, a move that proved very beneficial for those funds.

We remain comfortable that the health of US corporate earnings supports current valuations, particularly when combined with falling inflation and expansion in both services and industrial sectors. Consumer health also appears to be improving, with the K-shaped recovery, where only wealthier socioeconomic groups prosper, looking less pronounced than feared, as spending broadens across the spectrum.

UK's change of leadership not enough to calm debt markets

July presented a mixed picture domestically, dominated above all by Andy Burnham's ascent to Prime Minister. On the economic front, inflation eased to 2.6% in June, the lowest reading since March 2025, though services inflation remained sticky at 3.6%. The Bank of England held its base rate at 3.75% at its July meeting, with three dissenters pushing for a rise. GDP growth for 2026 was revised down to 0.7%, weighed down by rising energy costs driven by the renewed conflict in the Middle East.

UK borrowing costs continued to trend higher, with the 10-year gilt yield closing the month above 5%. While we hold no direct exposure to gilt markets, the pound strengthened slightly against the dollar on the back of expectations that rates will remain higher for longer on these shores.

Source: FactSet, Trading Economics 03/08/2026