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I often write about the economy because if growth is good you (normally, there are no guarantees, this is not financial advice) make money in equity markets. I remember repeating this to myself at the start of 2023, 2024 and 2025 and, although there were plenty of risks and dramas in each of those years, this proved to be the right overall framework. And, for the record, I still think it holds going into 2026.
But, equally, the stock market is not the economy. To illustrate there is this chart:
Go Keir Starmer! After a series of difficult decisions early on in his government, his policies are finally starting to bear fruit! I am guessing this will be news to those of you who are not regular Daily Mirror readers. And, unsurprisingly, I think there is something else going on here.
The one free lunch you have as an investor is diversification. Here you are looking at a market where the stodgy old FTSE 100 companies like AstraZeneca, HSBC and Rio Tinto have outperformed the technology heavy US markets. If you think: “I want to invest in AI, so I’ll buy US technology” it has just not been that simple. AI (like the internet) is a new platform and a new way of doing things. Most software businesses are built around the old way of doing things and have been clobbered even as their earnings (and 2 year forward looking earnings) have kept climbing steadily higher:
Meanwhile, if you think AI will keep revolutionising how white-collar workers go about things then these AI models need plenty of power to run. A single query to a model like ChatGPT uses roughly 10 times more electricity than a standard Google search. And model training runs can use enough energy to power a thousand US households for 6 years. This has seen investors scramble out of software businesses with uncertain business models and into energy providers which should benefit from the current global economic upswing as well as growing AI energy demand. Thankfully, a number of those energy, commodities and materials businesses happen to be listed in the UK. American investors, in particular, are buying the UK to benefit from this:
If you had told me in 2024 to invest in UK equities just in case AI became a big thing I would have stared at you in disbelief. But that is, at a high level, part of what is going on in 2026.
In the interests of political balance, I also think there is some truth to this depiction of the first 18 months of Labour:
Raising employer national insurance and the minimum wage makes it more expensive to employ people in the UK. And, whatever you think of Trump overall, his government has been more pro-business and more de-regulating than the one that came before. And you are starting to see some of the impact of this in contrasting US and UK employment data. US payrolls grew 130,000 in January. Meanwhile private employment in the UK (especially for younger people) remains weak:
That said, all is not bleak in the UK. There were some strong retail sales numbers out this morning and there does look to be an upswing in place post the November budget. But whichever way I look at it the US seems to be in a better place right now. But, as I started this note, the economy is not the stock market. And, for UK investors at least, thank goodness it isn’t.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
