Does the stock market correction herald a tightening of financial conditions? - November 24, 2025

Led by a decline in the valuations of stocks most closely linked to AI, the recent stock market correction has had only a moderate impact on the rest of the market. Can this continue?

Since its high of nearly 6,900 points at the end of October, the S&P 500, the flagship index of the US stock market, had lost around 5% by 20 November 2025. This correction, which is fairly modest for the moment, is mainly due to the decline in the valuations of leading artificial intelligence stocks (-10%). The spread to the global stock market as a whole remains moderate, with the Bloomberg World Equal Weight Index losing only 3% over the same period (Chart 1).

It is still unclear whether this correction reflects a healthy moderation of optimism or the beginning of a lasting reversal of fortune in the sometimes exuberant world of companies most exposed to the rapid spread of artificial intelligence. With a forward P/E ratio of around 26x, this segment remains more than 60% more expensive than the equal-weighted average for global equities (Chart 2). However, this premium is among the lowest seen since mid-2023.

The exponential – and very real – growth in spending directly or indirectly related to AI naturally fuels the hopes embedded in these valuations. Optimists believe this hope is legitimate, as the AI boom is being driven by highly profitable, efficient and powerful companies. Pessimists, on the other hand, point to the uncertainties of a new profitability model based on massive investment, as well as the increased risks of low-cost competition, particularly from China.

In any case, market behaviour is increasingly reminiscent of the technology stocks of 1999-2000, with a high level of volatility.

But the recent stock market correction also raises other issues, foremost among which is the crucial issue of financial conditions. A continued decline in AI-related stocks could have a knock-on effect, driving up the cost of capital, including in the corporate bond market. In addition, the famous ‘cockroaches’ identified by Jamie Dimon, CEO of JP Morgan, could multiply, particularly in the complex world of private credit.

However, this is not the view of Lisa Cook, a member of the US Federal Reserve who is particularly involved in systemic oversight. In a recent speech, she said she thought it unlikely that these ‘cockroaches’ – the few bankruptcies seen in recent months – would soon turn into ‘termites’.

Finally, some investors fear that the Federal Reserve will not deliver the expected rate cuts, which could lead to a tightening of financial conditions. If the Fed were to join the ECB in maintaining the status quo, would we not see one of the pillars of the market rally crumble? At this stage, that is not our view.

Beyond the short-term uncertainties surrounding the Fed's 10 December meeting, the key issue is the ability of central banks to support growth if circumstances require. This ability remains intact, as global inflationary pressures remain low. The rise in US tariffs ultimately has little impact given the disinflation of rents and wages, the moderation in oil prices induced by the increase in OPEC supply, and the spread of Chinese deflation (Chart 3).

This environment is creating a downward bias on interest rates and a positive asymmetry: central banks will cut rates if growth disappoints (the famous ‘put’), and will not raise them if growth is resilient. Therefore, whether or not the Fed decides to cut rates on 10 December will not change much, even if it may create some volatility. For the Fed, the main uncertainty in 2026 is the degree of politicisation. In this regard, we will see which candidate Donald Trump chooses to replace Jerome Powell in May 2026.

In conclusion, the strategy applied in our global funds remains fairly stable, as our highly diversified and equally weighted approach to equities makes our portfolios less vulnerable to the volatility of AI-related stocks alone. The other positions are dedicated to risk management: index put options, government bonds and money market investments.