AI frenzy masks fragile market foundations as macro cracks widen

Global equity markets have climbed into positive territory this year, but the rally is built on increasingly shaky ground, according to FTSE Russell's latest Global Equity Insights report.

The headline numbers look reassuring with the FTSE All-World up 6.8% year-to-date but dig beneath the surface and a concentration problem of historic proportions begins to emerge. During April's rebound, roughly half of all gains across the entire All-World index were generated by just 13 stocks out of approximately 4,250 constituents. Every single one was tied to the artificial intelligence theme.

That's fewer than a quarter of a percent of the index's holdings carrying the bulk of the load — a level of market narrowness that analysts at FTSE Russell say is reducing overall resilience.

The market's two-speed nature became especially apparent during the Middle East conflict that rattled investors in March.

Traditional defensive sectors delivered inconsistent protection. Healthcare and consumer staples offered limited shelter, while energy, utilities, listed infrastructure and mega-cap technology names emerged as what the report calls "new defensives" — sectors that held up or even gained as broader markets sold off. April's partial recovery then snapped back toward technology leadership, mirroring the pre-conflict playbook.

Tech earnings

Tech earnings in April were strong, with most companies beating estimates. But markets reacted differently this time to announcements about artificial intelligence capital spending. Where previous quarters had seen investors applaud AI investment plans almost uniformly, this time stocks were punished in cases where the link between spending and near-term revenue growth looked unclear. That shift could fragment the technology sector further in the months ahead.

The macro backdrop has deteriorated meaningfully. Inflation expectations have risen sharply on both sides of the Atlantic, largely as a consequence of elevated energy prices stemming from the Middle East situation.

Two-year inflation swap rates in the US have climbed by roughly one percentage point since December 2025 to around three percent. European economies, more exposed to imported energy, have seen even sharper moves, with UK and eurozone expectations rising by 1.2 and 1.7 percentage points respectively.

Central bank expectations have repriced accordingly. Fed Funds futures, which were pricing two rate cuts by the end of 2026 before the conflict began, have now shifted to pricing no change at all, with a fifty percent probability of a hike in the first half of 2027. The UK outlook is even more hawkish, with markets now pricing two rate increases by the end of 2026.

Consumer confidence

Consumer confidence has slumped. The University of Michigan sentiment survey has fallen to its lowest reading since the survey began in 1959, a deterioration the report partly attributes to spillover effects from tariff policy rather than solely the Middle East situation.

Eurozone confidence collapsed in April as energy supply risks mounted. US gasoline prices sitting at $4.45 per gallon are approaching the $4.50 threshold that the Dallas Fed has previously identified as the level at which demand destruction could set in.

Despite the gloom on macro, valuations have become more palatable across most regions following a broad de-rating in forward price-to-earnings multiples.

Developed Asia Pacific ex Japan now trades at 10.7 times forward earnings, sitting comfortably in the cheapest decile of its own ten-year history.

The US has pulled back from the 99th percentile valuation it occupied in the fourth quarter of 2025, dropping to the 68th percentile, though at 21.5 times forward earnings it remains expensive by any absolute measure.

Emerging markets have also cheapened, moving from 14.7 to 13.1 times, driven by compression in China and India.