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The winds of change are blowing through technology markets. A sector that seemed impervious to economic storms through the first half of the year has started to shudder. The United States (US) technology-focused exchange, the Nasdaq, has seen a sharp pullback, raising an uncomfortable question: are investors simply taking a breath after an exuberant run, or is this the first crack in the wider equity edifice?
Part of the sell-off can be traced to the very voices that helped fuel the surge. Sam Altman, the face of OpenAI and by extension of the AI boom, described the AI trade as sitting squarely in “bubble territory.” Coming from a figure so deeply embedded in the industry, this holds weight. When insiders hint that valuations look detached from fundamentals, investors listen. The response in trading circles was swift. Tech heavyweights bled out their market capitalisation in days, and smaller names in the AI ecosystem, often priced for perfection, saw even sharper declines.
Altman’s comment landed in tandem with a report from Massachusetts Institute of Technology (MIT) economists that cast a colder light on the AI narrative. Their analysis questioned whether recent productivity gains attributed to generative models are material enough to justify the astronomical valuations being assigned to firms aligned with the technology. The study argued that integration costs, efficiency losses during adoption, and the uneven distribution of benefits across sectors will temper the near-term impact. For investors who had convinced themselves that AI would transform profit margins overnight, the paper read like a bucket of ice water.
When insider candour and academic scepticism converge, sentiment can shift with startling speed. Markets that have been trading on a “fairytale”, rather than earnings, are especially vulnerable to sudden doubt. The latest drawdown looks like that dynamic at work – a recalibration not sparked by earnings misses or funding droughts, but by a narrative under review.
Still, the question lingers: does this mark the beginning of a sustained downturn in technology stocks, or merely a short interlude after months of froth? There are reasons to argue both sides.
A deeper slide
The case for a deeper slide rests on valuation and concentration. Mega-cap names now command price-to-earnings ratios not seen since the height of the dot-com era. Market breadth is thin, with indices increasingly driven by a handful of technology giants. Such fragility means that if confidence cracks in one or two of those leaders, the entire benchmark tilts. Add to that the likelihood of policy headwinds, from antitrust pressure in Washington to export restrictions with Beijing, and the conditions for sustained weakness seem firmly in place.
The counterpoint
Yet there is a counterpoint. Pullbacks after long rallies are neither unusual nor unhealthy. Tech has run ahead of the rest of the market by a wide margin. Taking some risk off the table in late summer, when liquidity is thin and event risk looms large, fits the pattern of prudent portfolio management rather than panic. The volatility index (VIX), while off its lows, has not surged to levels associated with systemic stress. Credit markets remain calm. That suggests this is still a targeted adjustment, not a wholesale flight from risk assets.
The Jackson Hole effect
The backdrop of the US Federal Reserve’s (Fed’s) annual Jackson Hole Economic Symposium only intensifies the ambiguity. Every August, the symposium draws the world’s central bankers and market thinkers. This week, the focus is squarely on how the Fed interprets a slowing US labour market against a backdrop of sticky services inflation. If Fed Chair Jerome Powell signals that rate cuts remain distant, tech could feel renewed pressure – growth stocks are exquisitely sensitive to discount-rate assumptions. Yet, if Powell hints that the door is opening to policy easing later this year, some of the sector’s bruises might heal quickly.
This interplay between narrative and macro policy is what makes the current moment precarious. Altman’s words and the MIT report have punctured the sense of inevitability around the AI trade. That opens space for doubt. Yet, Jackson Hole has the potential to either reinforce that doubt or temper it, depending on the Fed’s tone. Investors are caught between recalibrating a story and recalibrating a policy path – and neither offers clear guidance.
What should not be missed is how swiftly psychology has shifted. Only weeks ago, AI enthusiasm dominated every equity conversation. Today, analysts question whether the returns will match the hype, and traders scrutinise valuations with a harsher eye. In that swing lies a broader lesson: when prices get ahead of evidence, the correction rarely announces itself gently. It often comes through a catalyst that reframes perception. Altman’s bluntness and the MIT analysis together provided precisely that catalyst.
Whether the correction deepens will depend less on what is said in research reports and more on how earnings evolve in the next two quarters. If corporate results confirm that AI adoption is translating into margin expansion, then the recent sell-off may look like a necessary purge of excess. If results fall short, the re-rating could accelerate. Either way, the Jackson Hole conversation about rates and inflation will influence every tick in tech.
A LOOK AT THE MARKETS
Bonds
US Treasury yields stayed elevated Friday, with the 10-year note above 4.32% as investors waited for Powell’s Jackson Hole speech. Markets remain cautious, with traders pulling back rate cut expectations for September to 75%, down from over 90% last week. While inflation pressures from tariffs persist, economic data has shown little sign of labour weakness. Kansas City Fed President Jeffrey Schmid noted that policy should remain “modestly restrictive,” while Cleveland’s Fed President, Elizabeth Hammack, dismissed support for cuts just yet.
In the United Kingdom (UK), Gilts rose to 4.71%, buoyed by surprisingly strong private sector activity. August’s composite Purchasing Manager’s Index (PMI) climbed to 53.6, its best in a year, driven by robust services. UK manufacturing, however, continued to contract. The upbeat data and July’s 3.8% inflation reading have weakened the case for imminent Bank of England (BoE) easing. Markets now largely expect the Bank Rate to remain at 4% through to at least year-end.
German 10-year Bund yields rose to 2.734% following data showing the eurozone’s strongest private sector growth in over a year. The composite PMI touched 51.1, with factory activity rebounding for the first time since mid-2022. The European Central Bank (ECB) is expected to pause rate moves next week, though the market still anticipates at least one more cut this year. ECB President Christine Lagarde highlighted that the new 15% US tariff on European Union (EU) goods – while significant – is not as severe as feared.
Indices
US equities ended mixed on Thursday, with futures inching higher into today as markets await Powell’s Jackson Hole address for clarity on interest rate direction. The S&P 500 shed 0.4%, the Dow slipped 0.34%, and the Nasdaq tracked similar losses. US retail sector jitters weighed on sentiment – Walmart plunged 4.5% after missing earnings for the first time since 2022 despite raising its outlook. Multinational software company Intuit lost over 5% in after-hours trade, while communications technology company Zoom rallied 6% after the close on solid second quarter results.
In London, the FTSE 100 posted a fourth straight gain, closing at a new record high. Positive surprises in private sector data and a narrowed public sector deficit boosted sentiment, trimming the odds of a near-term BoE rate cut. Defence stocks gained on geopolitical uncertainty, with BAE Systems up 2%.
European equities edged lower, with the STOXX 50 down 0.3% and the STOXX 600 flat. Markets digested PMI strength and updated trade details between the EU and US. A new deal confirmed 15% tariffs on key sectors like autos, pharma, and metals. Eurozone PMI surprised to the upside, supporting hawkish tones within the ECB.
Commodities
Oil prices have firmed ahead of the weekend, with Brent crude holding above $67/barrel and on course for its first weekly gain in three weeks. Hopes for a quick resolution to the Russia-Ukraine conflict faded after renewed military strikes, from both Russia and Ukraine, near EU borders and on Russian refineries. Meanwhile, Washington ramped up pressure on India by imposing a 25% tariff, citing its Russian oil purchases as the reason – oil accounts for over a third of India’s imports. A large drawdown in US oil inventories also lifted prices, though continued builds at the ‘Pipeline Crossroad’, (Cushing, Oklahoma) suggest softer underlying demand. Traders are watching for any signals from Powell’s Jackson Hole remarks that could impact the global demand outlook.
Gold remains pinned near $3,330/ounce in quiet trade, extending a mild decline for the week. Investors are being cautious ahead of Powell’s speech, with no strong catalyst to break gold out of its tight range. Fed officials showed little appetite for an immediate rate cut, despite some signs of US labour market cooling. Markets are still pricing in a 75% probability of a 25-basis point US rate cut next month, though this has moderated from previous weeks.
Geopolitical risks – particularly in Eastern Europe and the Middle East – continue to lend underlying support to gold. Reports of the largest Russian drone and missile attack on Ukraine in over a month, alongside Moscow’s accusations of Kyiv rejecting peace terms, added tension. Still, the lack of movement in US monetary policy is capping further upside in the near term.
Currencies
The US Dollar Index remains firm around 98.6 on Friday, close to a two-week high, as traders braced for Jerome Powell’s Jackson Hole comments. Markets are reassessing the Fed’s next move, with a 75% chance of a September rate cut now priced in – down from over 90% previously. While US inflation remains sticky, the US labour market hasn’t shown significant weakness. Fed officials, including Schmid and Hammack, have urged caution on easing too soon.
The euro is trading flat near $1.165/€, holding onto most of its 2025 rally. Eurozone PMI beat expectations, reinforcing the ECB’s patient stance. Markets still price in one more ECB rate cut this year. The EU-US trade agreement clarified that most EU exports to the US will face 15% tariffs – lower than the originally proposed levels – which helped reduce some trade tensions.
Sterling has edged up to $1.347/£ after data showed UK firms recorded their strongest month in a year, led by services. Inflation rose again, but analysts flagged airfares as the main driver, not broad-based pressures. BoE cut expectations have cooled further, with just a 36% chance of a further move this year.
*Please note that all information is at the time of writing.
key indicators:
GBP/USD: 1.3410
GBP/EUR: 1.1565
GBP/ZAR: 23.76
GOLD: $3,329
BRENT CRUDE: $67
Sources: Bloomberg, Reuters, LSEG Workspace and Trading Economics.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
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