WeekWatch - 09/02/2026

Is the AI sugar rush over?

• Tech stocks struggled as AI optimism faded
• Interest rates remained flat in the UK and EU
• Japan’s Sanae Takaichi won a landslide election over the weekend.

For Seattle Seahawks fans, Sunday would have provided the euphoric feeling of seeing their team win the Super Bowl. For investors, however, the week would have been far less sweet, as fears around AI dragged down equities.

Until recently, AI had been good for investors. Excitement over its disruptive potential has pushed technology stocks to historic highs. 

Some of that excitement seems to have subsided in recent weeks, as investors have instead begun to fret over the sheer levels of investment being spent in the ongoing AI arms race. For example, in the past, Amazon announcing plans to spend $200 billion on AI infrastructure might have been greeted warmly by markets. Instead, last week it contributed to a notable drop in its share price. This led Carlota Estragues Lopez, Equity Strategist at SJP, to ask: “Is the AI sugar rush over?”

This investor nervousness is meeting the reality of already stretched US valuations to create some sharp swings – the S&P 500 dropped 1.2% on Thursday, before a rebound on Friday caused by people buying into the dip recovered some of the losses.

While big names such as Amazon and Microsoft may take up the headlines, they are not alone in feeling the pressure. Carlota notes: “It’s not just return on investment that worries investors, but also the risk of narrow market leadership that struggles to broaden beyond a handful of mega-cap names. Software companies, once viewed as prime AI beneficiaries, are increasingly seen as vulnerable to AI disruption. The MSCI World Software Index, a gauge for developed market software companies, is down 21% year to date, with nearly all constituents in negative territory, including several in Europe.”

Beyond software, new AI models have brought fresh challenges to elements of the legal and publishing world, and a number of companies in these sectors also dropped.

The irony is that, so far, results in the US have been quite strong, with profit margins as their highest levels since 2009.

Carlota adds: “I would say that this is not a reason to panic. Recent equity market volatility was caused by uncertainty, which is one of the primary reasons that our asset allocation views are over the medium-term - to protect clients against this short-term uncertainty. Our asset allocation views lean towards areas that have a balanced sector exposure in both growth and value sectors (UK, Japan, Europe) and away from regions that are heavily concentrated in technology which makes them more vulnerable to large sentiment swings like the ones we have seen this week (US).”

European central banks hold the line

Outside of the US, both the European Central Bank (ECB) and the Bank of England (BoE) voted to keep interest rates level. 

The ECB kept interest rates at 2%. There had been some hope of a cut after inflation fell to 1.7% in January (below the 2% target). However, the bank noted that it viewed risks to growth and inflation as broadly balanced. Therefore, it is generally expected to keep rates at the current level at least for the next few months. 

Arguably the biggest surprise instead came from the BoE. While it had also been broadly expected to hold rates this month, the decision turned out to be closer than anticipated. Interest rate decisions are voted on by the nine members of the Monetary Policy Committee (MPC), headed by BoE Governor Andrew Bailey. The vote ended 5-4 with Bailey ultimately casting the deciding vote.

Elsewhere in the UK, politics intruded into investing, as the ongoing fallout of Peter Mandelson’s appearance in the Epstein files continued. His earlier appointment as US ambassador by Keir Starmer has brought questions to Number 10’s doorstep. These questions unsettled the fixed income market, causing gilt yields to rise. 

Japanese election

Turning to Asia, the snap Japanese election called by prime minister Sanae Takaichi paid off, as she gained a majority in the Japanese parliament. 

Personally popular with voters, Sanae went to the polls seeking support for her plans around increasing spending, especially around defence. Now with a fresh mandate, and a majority in the house, she will be empowered to take potentially more assertive action. 

According to Martin Hennecke, Head of Asia & Middle East Investment Advisory & Comms, Sanae’s landslide win helped equities as the Yen weakened. However, he warned: “There is a possibility that inflation will rise as a result of supportive monetary policies as well, presenting a dilemma for the country’s savers to re-allocate cash holdings to other asset classes or face a rising risk of purchasing power loss through persistent negative real interest rates. 

“Global investors might want to watch this carefully if not learn from it, as former Fed Chair and Treasury Secretary Janet Yellen warned last month about the preconditions for ‘fiscal dominance’ (i.e. the size of the debt prompting central banks to keep rates low to minimise debt servicing costs) strengthening in the United States, too.”  

Pension shake-up could affect millions more workers

The government’s raid on pensions announced in last year’s Autumn Budget could affect many more workers than previously estimated, a government watchdog has warned.

Analysis from the Office for Budget Responsibility (OBR) on the forthcoming cap on pensions via salary sacrifice suggests the impact of these measures could extend beyond higher earners.

The changes will see employee pension contributions made via salary sacrifice and above £2,000 a year become subject to employer and employee national insurance contributions (NICs) from the 2029/30 tax year.

An earlier policy paper from HMRC suggested that fewer than half (44%) of employees using salary sacrifice would be affected, while the remaining 56% – or 4.3 million people – would not exceed the £2,000 contribution threshold.1

But the recent OBR analysis suggests that millions more could also be affected depending on how employers react to the new cap, citing a “highly uncertain” behavioural response to the measures.2

 Among the behavioural responses the OBR considered is a possible switch to relief at source (RAS) schemes instead. Under these, pension contributions are taken out of employees’ net pay, not gross. The pension provider will claim basic rate tax relief of 20% for the pension, but higher rate and additional rate taxpayers must pay income tax and then reclaim the additional tax relief from HMRC themselves. NICs are also payable on any contributions made through these schemes.

If employers move away from salary sacrifice entirely to RAS schemes it could see employers lower salaries in exchange for higher employer pension contributions. Abandoning salary sacrifice would eliminate NICs savings for all employees, including those not meeting the threshold.

The OBR also believes employers may pass on much of any additional NIC costs to employees by lowering their wages. This could also affect those paying in less than £2,000 a year through salary sacrifice schemes.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Sources
¹ HMRC - December 2025
² OBR - February 2026