Rhyme or reason

We look at the major themes doing the rounds in capital markets this week, from the eerie rhymes with history of 25 years ago to the latest on the UK following the Spring Statement.

‘Liberation day’ and a bursting bubble

This time 25 years ago the world’s investors were beginning to wake from a speculative dream. The ‘dot-com bubble’ inflated into the end of the last millennium, with four corporate ‘horsemen’ – Dell, Intel, Microsoft, and Cisco – at the centre of a gathering market frenzy¹. The mass-less possibilities of the internet briefly loosened the gravitational pull of corporate fundamentals on share prices (Figure 1).

Figure 1: S&P 500 Real Total Return from 1900 to 2025

Source: Shiller, Barclays. Note that past performance is not a reliable guide to future performance.

As we’ve pointed out² several times in the last few months, the starting point for the US economy today remains one of considerable pep. Her consumers remain well armed in net asset and real income terms, while her corporate sector continues to own important chunks of the incoming industrial revolution. Following a reset of investor expectations this last couple of weeks, there is a bit less froth in her capital markets too.

However, many are downgrading expected growth as they wrestle with higher and wider than expected tariffs. This combined with the ripples from DOGE and a sharp slowing in labour force growth are understandably worrying forecasters. Meanwhile, those looking for cracks in the AI story are starting to find them³.

As with the dot com bubble, investors should stay humble in assessing the potential of a new technology in real time. Much of the excitement in 1999 turned out to be misplaced, but not mistaken. The internet and associated breakthroughs have indeed been transformative in myriad ways.

Even so, the ten most valuable US technology stocks in 2000 underperformed the wider S&P 500 for the 15 years following. Note that past performance is not a reliable guide to future performance. The lesson here is that industrial revolutions can be unforgiving for concentrated investors, particularly those assuming that the recent past must be prologue.

The US remains the world’s most dynamic large economy by a distance. Even with that more disruptive force in the Oval Office highchair, her capital markets will continue to play a central role in our funds and portfolios. They are far from the only game in town all the same. Other parts of the world have long offered valuation appeal, the question remains as to whether they can add tactical kickers.

The world outside the US

After a box office start to the year for stock markets in both regions, this week has seen a pause for breath. A fractious European council doused some of the burgeoning excitement on Europe following Germany’s leap into the fiscal unknown. At the same time, China’s policymakers are not quite matching actions to words on measures to boost consumption⁴.

Data and policy in the UK generated some column inches this week, albeit probably fewer than feared. Inflation data were broadly encouraging, even if we would continue to steer clear of many messages derived from after the decimal place. This helped set the stage for the Chancellor’s Spring Statement (upgraded only recently from a forecast, but falling short of a budget).

Higher interest rates than assumed in the October plan, alongside slightly lower growth, left the government with some repair work to do. This was mostly achieved with a cut to spending and an upgrade to outer year forecasts by the Office for Budget Responsibility. The doomers in the commentariat still found plenty to roll around in of course. Most lamented how vulnerable the fiscal breathing room would be to further disappointment in the months ahead.

Perhaps. However, the UK has been showing tentative (albeit uneven) signs of picking up in the last few months. A revitalised Europe, with Germany less spendthrift at its heart, may be helpful given the role of proximity in economic growth.

Meanwhile, much as with the US, the UK’s consumer is in better health (in aggregate) than widely feared. Positive real income growth may well keep the central bankers up a little at night, but this is also an important tailwind for consumption. It is also, at a time of rapid technological change, a potential stimulant to much needed corporate investment⁵.

The message remains very familiar hopefully. Keep an open mind and don’t exaggerate the role of governments in growth outcomes. These economies are all too big, various and complex to be in the thrall to a small coterie of individuals and their ideological preferences/bugbears.

That is not to say that governments can neither help nor hinder, they can do both – sometimes at the same time. However, we need to remember that, as investors, our exit price will not be defined by the world as it is now (unless we decide to sell now). It will instead be defined by the world as it appears in 5, 10 or even more years hence and the technological change that happens between now and then.