Wolstencroft: Investor complacency is making me nervous

My quarterly updates are pretty sparse when it comes to text and my monthly commentaries are non-existent to minimal. However, I felt the urge to write a longer note, mostly because I am growing nervous about problems brewing in wider financial markets. 

During May, investors decided all was well with the world, that the oil problems were temporary and it was time to take profits in some of the big winners and rotate into Europe’s tech names. This is not a view I share. 

Widespread signs of speculation  

First, the market is full of short-term participants who are happy to buy into momentum in share prices but are less interested in valuations and momentum in the underlying businesses.  

Signs of speculation are widespread – not just in the high turnover as a proportion of market capitalisation, but also in factors such as rising bank lending in the US and high valuations in certain areas of the market.  

Obviously, the surge in share prices of AI companies has been a big influence. We all think AI tools are great; the issue is whether they will make money for investors. My concern is there are too many providers – at least 15, all of which are in a fight to the death to see who wins. Consumers and semiconductor makers are already benefiting, but whether the providers do is another story. 

The market is full of short-term participants who are happy to buy into momentum in share prices but are less interested in valuations and momentum in the underlying businesses

As a reminder, railroads, autos, telecoms and airlines were all perceived as growth sectors at one point, but three factors changed: competition, costs and ownership.   

1. Competition 

A high price/book attracts more players. In 1999, telecom stocks traded at 10x price/book, as I recall. This meant budding entrepreneurs could build a company for $100m and float it on the stock market for $1bn. What self-respecting business owner would turn down that sort of return?  

The result was the capital stock of telecoms kit grew rapidly, competition was intense and while consumers benefited, the return on capital was awful. Telecom stocks subsequently underperformed the market, even though earnings continued to grow after share prices peaked. 

In the past couple of years, the number of AI service providers has exploded. A price/book of 10x on this type of stock now seems quaint. There is a tendency to assume this sector is only made up of US players, but there are plenty of Chinese names in there, too. This will make sense to the government in Beijing, even if it doesn’t to shareholders – witness the downturn of Tencent’s earnings per share (EPS) forecasts as capital expenditure rises¹. 

2. Costs

DRAM (dynamic random-access memory) prices have shot up this year. Semiconductor profits are through the roof. By all means, own these stocks if you wish; but be aware that while there may be a bubble in the valuations of AI makers, we think there could also be a bubble in the profits of AI suppliers.  

The sudden increase in the latter group’s earnings is a symptom of both the surge in capex/GDP around the world and the rising costs of AI makers. 

3. Ownership 

If you own a business that is highly valued, suffering from intense competition and rising costs, what should you do? Maybe sell it? 

As many founders of TMT (technology, media and telecom) stocks discovered 25 years ago, being a billionaire on paper is one thing, but being able to spend your theoretical wealth is quite another.  

The AI entrepreneurs of today want to avoid the mistake of the previous generation by cashing in some of their chips. To do this they have spun a narrative of growth and of giving investors the opportunity to own the next big thing. The reality is that in every year for the foreseeable future, shareholders will need to contribute more money to the company or suffer dilution.  

Most AI companies are loss-making, cash-consuming businesses – and there are a lot of them. Once these businesses are listed, they will be marked to market each day, not every now and again. This can be great when share prices are rising, but watch out once price momentum turns negative. 

Rising bond yields  

Aside from short-term speculation, the other big problem giving us cause for concern is the rise in bond yields. This indicates government profligacy is causing issues at a global level. 

Today, governments across the world seem to look upon higher spending and, to a lesser extent, higher taxes as the solutions to most problems. The outcome is higher bond yields and slower growth, which doesn’t fill me with optimism.  

Being a billionaire on paper is one thing, but being able to spend your theoretical wealth is quite another

My guess is bond yields will head up over the next decade until governments change their behaviour – but they will only do this at the behest of the electorate. 

Do you see any evidence the populace is clambering for less government spending and smaller deficits? Me neither. Not only will a rise in bond yields cause losses for fixed income investors, but it will also make future returns from equities look less attractive in comparison. For a toppy, speculation-driven market, this does not bode well for the future.   

How can investors protect their portfolios? 

So what can investors do to protect themselves in this market? One option is to focus on valuations. By way of example, the price-to-earnings (P/E) ratio of our SmartGARP European Equity Fund is 10.1x versus 14.4x for its benchmark, the FTSE World Europe ex UK index benchmark. It’s a similar story across our SmartGARP strategies². Remember, hyped stocks fall furthest in a correction. 

Source: Artemis as at 30 April 2026

We’ve also edged up the fund’s cash holding to more than 5%³. A normal level would be between zero and 1%. This may turn out to be a temporary (and wrong) position and in a few months’ time it could fall back to its normal range.  

Should the AI bubble burst and government bond yields balloon, a 5% cash position wouldn’t exactly make us unstressed. But combined with owning lower valued stocks that are backed by more positive news flow, we think it should mitigate the risks. 

This article was originally published in Citywire Wealth Manager on 19 June 2026.