Markets Update October 2025 – Artificial intelligence – driving the markets, but with increasing risk

The market environment remains robust overall, despite the renewed escalation of the trade dispute between the US and China. Trade talks have been disappointing so far. This was compounded by China's export restrictions on rare earths, to which US President Donald Trump responded by threatening additional, drastic tariffs from November onwards. Market participants were not particularly impressed by this rhetoric, and their mood was only temporarily dampened. The reason: many observers view this as part of Trump's usual negotiating tactics, which he uses to persuade his counterparts to make concessions. Furthermore, despite the recent tensions, the meeting between Trump and Chinese President Xi Jinping planned for the end of October as part of the APEC summit has not been canceled – a sign that the US government clearly does not want to burn its bridges with China for good. Concerns about declining credit quality at individual US regional banks also caused only brief uncertainty. After initial losses, the relevant industry index quickly stabilized again.

The current reporting season underscores the constructive investment environment. It is traditionally kicked off by financial stocks, which have reported solid results overall and exceeded expectations, which were higher this time than in previous quarters. Nearly all subsegments within the industry reported strong figures, particularly investment banking, which benefited from the positive situation on the stock markets and the ongoing AI boom. The good start to the reporting season fuels hopes that the usual pattern will continue this quarter: exceeded profit estimates are creating a new buying mood on the markets at the end of the year.

AI boom: an economic perpetual motion machine?

The AI boom has entered a new phase and is becoming increasingly speculative. A form of “financial engineering” is becoming increasingly prevalent in the industry: companies are using their high stock market valuations to acquire stakes in other companies, which in turn award contracts within the same network. In this way, intangible “Wall Street capital” – the high valuations – is translated into real economic processes. This artificially fuels and prolongs the positive profit momentum – and with it the AI boom itself.

This increasing interdependence strengthens the market power of the US tech giants, but at the same time is reminiscent of an economic perpetual motion machine – one that only works as long as market players believe in the AI boom and valuations remain high. For now, the wheel is still turning, supported by the high profitability of the large technology companies in their core business. But the fall height is growing – and with it the risk of significant corrections as soon as the first serious doubts about AI development arise. In the short term, this risk scenario is unlikely, as the investment environment is currently too constructive. However, professional investors should keep an eye on it in 2026 and the years that follow.