- Asset prices, particularly tech stocks and metals, remain very high.
- Low rates help propel asset prices, but room for further decline looks limited.
- AI demand driven inflation of electricity and tech goods is in the pipeline.
- We find the markets looking for better value proposition among AI companies.
- We find this to be overdue and welcome.
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Commentary: Healthy market correction
After an extended period of across-the-board rally, some adjustment in asset prices has begun to take place. The first five weeks of 2026 has been marked by a pick-up in stock market volatility. We don’t think a lasing respite is around the corner, as three dynamics are at play that could keep the markets uneasy.
First, from gold to silver, tech stocks to valuation of privately held AI companies, asset prices needed some breather after reaching stratospheric levels. Some moderation of rampant speculation was warranted, and the recent adjustment barely corrects that. Valuation metrics such as yield gap and Case-Shiller PE show the US stock market still as rich as it was before the 2008 Global Financial Crisis. There is further room for adjustment.
Second, sharp rise in asset prices typically takes place with low and/or declining interest rates. We don’t expect a major jump in global rates, but the room for further decline looks limited, especially with massive public sector debt now finding competition with rising private sector borrowing to fund AI investments. Steeper yield curves and wider corporate spreads are at play this year, in our view.
Third, before AI-driven disinflation arrives, there will likely be AI-buildup-driven inflation. From electricity price to tech equipment, there are elements that can spoil the benign inflation prevailing presently. A couple of data points that show this dynamic could further spoil the mood of the markets.
Some context is critical here: a correction in asset price has been overdue and is healthy. During tech waves and investment upcycles, asset prices, financial dealmaking, and real investments tend to overshoot as exuberance takes hold. Markets know full well that many companies riding this wave will end up failing to deliver with upsized gains, but without perfect foresight, no one knows which will be a winner and which one a loser. As valuations of hyper-scalers reached dizzying heights, distinctions such as consumer-facing AI versus enterprise-facing AI, as well as companies in need of substantial borrowing to scale versus those with the capability to channel retained earnings have begun to be made. Rotation toward firms with relatively more viable business models is a healthy one, in our view, even if that takes place in the context of some value destruction.
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