Lately, I’ve read article after article warning that we’re on the brink of a brutal stock market crash if the artificial intelligence (AI) bubble bursts. I’ve also read plenty claiming we’re heading for another bull market as AI drives productivity and central bankers cut interest rates. What on earth are investors supposed to make of that?
I have my own views, which I’ll come to shortly, but first I wanted a steer from ChatGPT. If it’s so clever, maybe it can tell me.
The base case for a rally
As requested, it set out the case for a festive rally. It highlighted Wednesday’s (10 December) decision by the Federal Reserve to cut interest rates by 0.25%, saying: “Cheaper borrowing should support corporate profits and coax investors back into riskier assets“.
So far, so generic. It then flipped to the other side, warning that “AI has turned into a concentration trade and plenty of professionals think froth is building”. It added that recession risk in the US, plus political and tariff noise, could spark a sharp sell-off if confidence cracks.
Most of that was simply my own prompts fed back to me. All very artificial. And not hugely illuminating either.
One response did surprise me though. “My base case is a short, choppy run higher into Christmas rather than a full-blown crash.” AI can’t predict the future, so where did that come from?
Then I worked it out. ChatGPT had embedded a link from a financial newspaper. So essentially it lifted a journalist’s opinion and handed it to me. Ask a different question and it’ll probably latch onto a different source, and deliver a completely different forecast.
That’s enough! I enjoy playing with ChatGPT but its limitations are obvious. My question was a little unfair. Nobody can second-guess markets. There are too many variables and investors only come unstuck when they try. I prefer to put away my crystal ball and do what I always do, comb through the FTSE 100 for stocks that look good long-term value, blending share price potential with reliable dividend income.
British American has had a merry 2025
One that fits the bill is British American Tobacco (LSE: BATS). It’s among the most dependable dividend payers on the entire index, increasing shareholder payouts every year this millennium. Reinvesting those distributions over time can deliver serious compounding power.
The share price has also done brilliantly lately, rising around 48% over the last year. Yet it still looks decent value on a price-to-earnings ratio of 12. The trailing dividend yield sits at 5.4%, a terrific level of income at any time.
There are risks. Tobacco’s under pressure as the West turns against cigarettes. The big names have kept profits flowing by building share of the shrinking market and pushing smokeless alternatives. Regulatory pressure never goes away and there could be a backlash against vapes too.
Investors must decide whether it’s an industry they’re comfortable with. As a pure investment though, tobacco has been remarkably resilient.
It’s a classic defensive stock that should keep going whether markets crash or rally before Christmas, or at any point thereafter. Anyone fretting about short-term volatility should think long-term instead.
This is one option, and I can see others across the market today. I won’t ask ChatGPT to help me pick them though.
