Market Review 17th November 2025

Everything you need to know, Simplified!

Summary

• Criticism toward Artificial Intelligence (AI) accounting assumptions is building as AI-linked equities have begun to underperform a constructive wider market backdrop

• Hedge fund manager Michael Burry has highlighted concerns over depreciation assumptions on AI capital expenditure (AI capex), arguing that overstated asset lives risk flattering near-term earnings

• UK gilt yields rose sharply after reports that income tax hikes may be off the table, though fiscal discipline still points toward tax rises of some form in next week’s Budget

• A Budget that balances inflation credibility with fiscal headroom (a buffer that indicates the health of public finances and provides room to manoeuvre during economic downturns or emergencies) could support gilts and maintain the Bank of England’s (BoE) bias toward further interest rate cuts, with inflation expected to fall materially this week

• The October UK inflation release is expected to show a significant slowing of annual price growth to 3.5% from 3.8%.

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Market Review

‘The Big Short’s’ Burry challenges AI earnings quality as he closes fund

Michael Burry, founder of Scion Capital, made famous for calling the US housing collapse – as played by Christian Bale in the film ‘The Big Short’ - last week announced he will close his fund and return capital to investors. He may continue as a family office, investing only his own capital.

Before winding down Scion, Burry had built meaningful short positions against select AI leaders. He has also been increasingly vocal about AI capex and the accounting assumptions underpinning reported earnings. This coincides with the mild reversal in tech and AI names over recent weeks, where AI-linked equities have underperformed an otherwise constructive market backdrop.

Microchips, costing tens of thousands of dollars each, are emblematic of the scale and speed of the current AI build-out. They sit at the core of roughly $400bn in AI-related investment expected this year and potentially $500bn in 2026. However, unlike some historic ‘overbuild’ cycles i.e. railways in the industrial revolution or excess fibre in the dot-com era, the risk here relates less to redundancy and more to useful life expectancy. Estimates for economic longevity for Graphic Processing Units (GPUs) vary from three to six years, but their practical relevance could be even shorter given the pace of innovation.

This underpins Burry’s concern: depreciation assumptions. He argues that assumed asset lives may be too long, which suppresses near-term expense recognition and flatters earnings. Some hyperscalers (companies that provides massive-scale cloud computing infrastructure and services through large data centres) have extended depreciation schedules in recent years; if replacement cycles gravitate toward two to three years while depreciation is booked over five or six (or, in some rare cases, more than ten), profitability metrics will prove overstated.

Hyperscalers say that the system is designed to optimise GPUs rather than discard them; reallocating older chips to lower-intensity workloads. There is logic in that argument.

Where the greater vulnerability may lie is not with the mega-caps - whose balance sheets, funding structures and policy relevance provide clear resilience - but with the leveraged second-tier operators building data-centre infrastructure. Some of these models rely on GPUs as pledged collateral financed by private credit. If asset life proves shorter than assumed, the refinancing maths becomes more difficult.

Burry’s argument is not that AI technology fails to deliver long-term productivity gains. It is that the path from promise to earnings should not use generous depreciation assumptions, particularly in a capital-intensive arms race.

UK gilt yields rise

UK gilt yields moved sharply higher on Friday following reports that the Labour government is now unlikely to raise income tax. The initial reaction drew comparisons with the Truss mini-Budget period; however, not all the conditions were met. As John Authers has highlighted, the combination of rising yields and a weakening currency - central to the 2022 Liability Driven Investment episode (where gilt yields surged unexpectedly) - was absent this time.

Uncertainty around next week’s Budget remains high, though fiscal discipline remains the stated priority. Some form of tax rise still appears likely. Reeves will be conscious that market confidence is a core part of the policy constraint set, and any package that signals credibility on inflation while improving fiscal headroom stands a better chance of supporting gilt demand, keeping bond vigilantes at bay.

One proposal gaining attention is a combination of higher income tax alongside a cut in VAT - potentially cooling inflation while improving fiscal headroom. If adopted, it may allow monetary policy to remain on an easing trajectory. Third-quarter growth slowed to 0.1% from 0.3% in Q2, and labour market data showed further softening keeping the BoE on track to cut again in December.

A positive gilt-market response would lower the government’s borrowing costs and, in turn, marginally expand fiscal flexibility. Any gilt market positive budget will be a win for Reeves, even if it’s at a long-term cost.

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The week ahead

Wednesday: UK inflation

Our thoughts: Inflation is expected to slow significantly to around 3.5% in October from 3.8% previously, largely due to energy base effects. Forecasts suggest a gradual slowing path from here. Combined with a softening growth and labour backdrop, this keeps the BoE biased toward further interest rate cuts in December.

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