Daily market update: markets go back into reverse, Babcock, ASOS

Relief around Nvidia’s results didn’t last long as investors couldn’t shake their fears that the AI boom might have got ahead of itself.

There is a lingering concern that the AI revolution might take longer than expected to truly transform the way companies do business. People in the late 1990s were right to predict the internet would change the world, they just had to wait a bit longer than initially thought, and that resetting of expectations was central to the bursting of the dotcom bubble.

Importantly, there are many differences between now and the dotcom boom and bust. That offers a glimmer of hope we’re simply seeing a perfectly common market pullback after a fruitful period rather than a full-blown correction.

Companies leading the AI craze are in a strong financial position. There aren’t signs of excess on the market such as back-to-back IPOs, and most of the big names splashing out on tech infrastructure aren’t binary bets on AI as they have solid business operations that already support strong earnings. They’re very much jam today rather than jam tomorrow.

There is a clear shift in risk appetite evident today, with tech stocks weaker and defensive-style companies such as utilities and consumer healthcare product providers in vogue as people seek to hide in traditionally safer parts of the market.

When markets remain on a knife edge, it’s inevitable that some people will want to protect any profits by trimming positions. That selling behaviour is likely to be what’s dragging down markets.

Bitcoin, which sits at the top end of the risk spectrum, extended a losing streak that’s been in motion since late October. If people have lost confidence in tech stocks, they certainly won’t have the confidence to speculate on cryptocurrency.

It also didn’t help that investors are struggling to predict what the Federal Reserve will do next with interest rates. Conflicting messages from central policymakers have left investors scratching their heads over whether rates will be cut next month or not. Markets are now expecting a 67% chance of no change at December’s meeting, whereas a month ago there was a 98% chance of a quarter percentage point cut.

When everything looks gloomy, it’s important to look at the Vix measure of expected stock market volatility. The so-called fear gauge now stands at its highest level since the chaotic few weeks on the markets in April when Donald Trump shocked the world with his Liberation Day menu of sky-high tariffs. Expect more big swings up and down for share prices, meaning investors need to take a travel sickness pill to get through the journey.

The UK’s flagship stock index fared much better than many of the other major European markets on a relative basis thanks to its plethora of defensive-style businesses. Unilever was in demand as it sells products people buy on their weekly shop regardless of what’s going on in the world. Its shares were also boosted by speculation that it might offload some of its food products including Marmite.

Headache tablet seller Haleon also moved higher on the FTSE 100. Investors were first in line for its products as they sought relief from a chaotic session.

Babcock

Defence and engineering contractor Babcock has had such a spectacular run this year – the share price more than doubling – that the lack of upgrades in today’s statement has sparked a negative market response.

That’s not to say the first-half results were bad, far from it. Rising demand in the defence sector, a key theme of 2025, was evident in a meaningful uplift to revenue and profit.

An increase in the margin suggests the company is remaining disciplined too, and a chunky hike in the dividend and continuing roll-out in the buyback programme reflect strong cash generation and a healthy amount of confidence on the outlook.

However, that is not ‘new news’ for the market which has already priced in a significant boost for Babcock from increased military spending, particularly in Europe.

Management won’t worry about that; all they can do is continue to execute on their strategy and medium-term goals for margins and growth.

Expansion in the nuclear sector, which is still at a fairly nascent stage, could energise investors once more, given Babcock’s expertise in this area.

ASOS

A key tenet of the recent strategy at fast fashion online retailer ASOS has been one of retrenchment as it looks to repair an ailing business and rebuild profitability.

It appears what patience there was among investors is fast running out as the company’s full-year sales decline significantly more than expected.

Guidance implying another year of lower sales to come isn’t doing much for the mood either.

Having emerged from the pandemic with an unsustainable approach, it’s clear some progress has been made. Stale inventory has been cleared, the balance sheet has been rightsized, and costs have been brought under control.

However, none of that can fully obscure the negative picture on demand, with the company facing increased competition and a downbeat consumer backdrop.

ASOS is trying through a combination of loyalty schemes and technology, using AI to generate outfit inspiration, to drive engagement with its target demographic.

Until the market sees some signs that its efforts to win back shoppers are paying off, ASOS may not get much credit for the underlying progress it has made.