Investing & Performance | 6 June 2023

Monthly update: Rise of the machines

A wave of interest in artificial intelligence has helped send technology stocks soaring. But the reliance on a small number of stocks to carry markets could be unsustainable.


The growing excitement around artificial intelligence (AI) has given US stocks a boost. The S&P 500’s rally this year has been driven by a select few of the index’s biggest technology companies that are at the centre of the AI revolution. Although AI is not a new topic (Forbes published an article about “The new face of artificial intelligence” in 1998), interest surged after OpenAI’s ChatGPT took the world by storm. Companies are now rushing to employ the technology, with around 70% of firms expected to be using AI by 2030, according to a McKinsey report from September 2018.

Elsewhere, UK bond prices fell after higher-than-expected inflation for April raised fears that the Bank of England (BoE) needs to hike interest rates beyond 5% in the coming months. The UK’s stubbornly high inflation rate is starting to ease, but not by as much as economists were hoping. Despite almost no economic growth, the UK continues to experience high inflation due to the energy price shock, supply-chain problems, Brexit and workforce sickness.

Core inflation, which strips out volatile energy and food costs, picked up pace again jumping from 6.2% in March to 6.8% in April – a 30-year high. It’s a measure closely monitored by the BoE when deciding monetary policy. With inflation proving to be stickier than expected, it’s likely the central bank will raise interest rates further this year.


A select number of technology stocks have dominated US market performance this year. Because of their large weight in the S&P 500 (Apple and Microsoft alone account for 14%), the index gained around 9% since the start of the year (as at 31 May 2023). Quite the contrast from the sector’s underperformance last year. However, the excitement over AI is distracting from what’s happening elsewhere.

Howard Sparks, US Equity Research Analyst at Coutts, says: “The rapid rise of AI has created a frenzy on Wall Street with investors piling into shares of big tech companies that are leading the field. However, it’s not very healthy that such a small number of stocks are driving the market as this won’t be sustainable in the long term.”

Fears of sticky inflation have sent global bond yields somewhat higher this month, although less than we’ve seen with UK bonds impacted by the inflation data. Our exposure to UK gilts remains minimal as they represent 1.7% of the bonds in a typical GBP balanced portfolio and 3.1% in a typical defensive portfolio. Bond prices generally fall when rates rise because newly issued bonds come with higher yields.

Notwithstanding the S&P 500’s positive performance so far this year, key data still points to the probability of a US recession. Central banks have painted themselves into a corner at this point – part of their mandate (labour market) seems to be in great shape, but at the cost of higher inflation. With this scenario, we are cautious about the odds that they can achieve a “soft” landing.

More generally, with markets driven by a handful of stocks, sticky inflation pressures, a still tight labour market and the rising probability of a US recession, our portfolios remain conservatively positioned.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs.


The US was on the verge of running out of money in May due to a standoff between the White House and Congress over borrowing limits. The debt ceiling reached its limit of $31.4 trillion in January. If the debt limit wasn’t raised, the government would’ve had to prioritise the payment of its bills.

We understand that while political events may create short-term market noise, their long-term impact is typically limited. So, while the US debt ceiling has been hitting the headlines, we’ve seen nothing to change our market assessment. The US has never defaulted on its payments before, with past debt ceiling battles typically ending with a hastily arranged agreement in the final hours.

According to the US Treasury, since 1960, the US government has raised or altered the debt ceiling 78 times. In 1995 and 1996, clashes over federal spending between the Republican-controlled Congress and President Bill Clinton resulted in the government being partially shut down twice for a total of 26 days which didn’t trigger a default on US debt. There was also a stalemate between President Barack Obama and the Republicans in Congress in 2011, but an agreement was reached to raise the debt ceiling in the final days.

Howard says: “Past debt ceiling standoffs have tended to have a more significant political impact rather than financial impact. For instance, during the 1995–96 clash, there wasn’t any noticeable effect on financial markets despite the uncertainty. During the 2011 debt ceiling discussions, markets temporarily dipped after the US credit rating was downgraded, but soon rebounded after a resolution was reached.”

However in this instance, the Republicans, who have a majority in the House, initially refused to raise the debt ceiling unless President Biden and the Democrats agreed to spending cuts. Negotiators from Democratic and Republican parties reached an agreement to raise the debt ceiling at the end of May, which was cleared by Congress shortly after.

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Coutts’ clients can find out more about what’s happening in the investment markets and how it impacts their investments by speaking to their private banker.



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