The UK equity market could prove more resilient than U.S. stocks if enthusiasm surrounding artificial intelligence fades, according to a new report from Capital Markets. The research suggests the FTSE 100’s limited exposure to technology companies and its defensive sector mix leave it in a stronger position than many international indices.
Although U.S. technology shares have driven global markets for much of the year, recent weakness has highlighted the differing performance of more diversified markets. The FTSE 100 has continued to show relative strength, outperforming expectations during periods of heightened geopolitical uncertainty.
So far this year, the FTSE 100 has risen 9.21%, adding around 2% over the past month. The Nasdaq 100, meanwhile, is up 12.17% in 2026 but has declined 3.6% over the same monthly period.
A Very Different Market From the Dotcom Era
“If the AI-fueled stock market bubble is bursting, we believe the UK stock market will hold up better than most of its peers, unlike the post-dotcom crash,” said Joe Maher, senior market economist at Capital Markets.
The firm argues that the UK’s equity market bears little resemblance to the one that existed during the dotcom boom.
At that time, technology, IT and communications companies represented around 30% of the MSCI UK Index. Today, those sectors account for just 3%, significantly reducing the market’s exposure to a technology-led sell-off.
“As a result, the tech sell-off at the time weighed heavily on the UK equity market, while its minimal tech exposure and defensive composition should now put it in a good position,” Maher said.
Resilient Growth Could Cushion Markets
Capital Markets believes another important difference is the economic backdrop.
Unlike the early 2000s, when the collapse in technology stocks coincided with a U.S. recession, the firm expects economic activity to remain relatively resilient if AI valuations correct.
That should “limit the downside in global stock markets,” including UK equities.
Dollar Weakness Could Add Further Support
The report also argues that a reversal of the AI trade would likely weaken the U.S. dollar.
“If the AI boom turns into a bust, we expect a shift toward monetary easing by the Fed and a slowdown in capital flows to the US to cause a general weakening of the dollar, including against the pound,” Maher said.
Despite that view, Capital Markets continues to expect sterling to weaken over the longer term as it anticipates Bank of England rate cuts next year.
Defensive Leadership May Continue
The firm’s analysts note that the FTSE 100 has recently benefited from higher oil prices and stronger financial stocks, although they expect those advantages to diminish over time.
Even so, Capital Markets maintains that the AI boom is likely to unwind over the next year and believes “it is possible that this process is already underway.”
Leave a Reply