EDecades from now, investors will ask themselves how long the stock market can continue to rise. Is it safe to buy more stocks?Would their pension or stock portfolio be vulnerable if financial markets, especially those in the United States, collapsed?
When the stock market rises to historic highs, beyond the point at which normal profits can sustain stock prices, a small group of “experts” typically warn of an impending crash.
Many of these experts, urban analysts and financial economists, make early predictions that the market will continue to rise for many more years. Meanwhile, these experts are discredited and all warnings are ignored.
Today we are witnessing the same thing. And then again, those who warned last year and the year before that the artificial intelligence boom was man-made and that corporate borrowing by tech companies was too high can be seen tweeting about how their moment of vindication will come.
Investors are now in a dangerous situation where they become stubborn about anything that prevents them from pumping more money into the stock market.
This discussion focuses on the New York Stock Exchange’s S&P 500 index and the tech-heavy Nasdaq. But this matters to everyone because the biggest financial shocks of the past 100 years have all been caused by U.S. banks, U.S. investors, or U.S. financial markets in other parts of the world.
For now, the focus is on just seven companies known as the Magnificent Seven: Amazon, Alphabet (Google), Nvidia, Meta (Facebook), Microsoft, Apple, and Tesla (which will likely soon merge with Elon Musk’s other venture, SpaceX).
There were signs of waning investor appetite early in the year, as many of the seven companies began borrowing to finance their AI investments.
This loss of appetite for stocks became even more severe when Donald Trump began firing rockets at Iran in late February.
However, the panic did not last long. Fear of missing out kept most investors in the game. In a sign of how hard investors have become against expert advice and the potentially devastating effects of war (or the threat of more borrowing, higher interest rates, etc.), President Trump only said in late March that he was in talks with Iran to try to get the S&P 500 back up.
And last week was no exception. More warnings and more stock market gains.
On Thursday, Ludovic Soubran, chief investment officer at Germany’s largest insurer Allianz, said SpaceX’s decision to use a $25 billion bond sale to borrow money so soon after raising a record $86 billion in a New York listing was a clear sign that the market was entering “bubble territory.”
His comments follow those from Jeremy Grantham, the 87-year-old founder and investment adviser of a major asset management company, well-known in the city, who said the AI bubble was about to burst and he was selling himself short.
Dhaval Joshi, head of global strategy at BCA Research, called the current situation crowd madness.
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Citing research on investment cycles, he said markets work well when you take in all available information and process it to reach a conclusion.
Then things could change. “Crowds can go from wisdom to madness when investors no longer have a variety of opinions, but their opinions become correlated. When this happens, either their opinions align or dissenters sit out, and the crowd loses the diversity that is the basis of its accuracy.”
Joshi said he looks to economic recessions and sharp rises in interest rates as more historically accurate triggers for market crashes.
Grantham’s argument is that AI is similar to the invention of trains and the internet. Everyone overinvests, and then they realize that it’s a utility, like electricity, and they realize that there’s not much money to be made from the invention itself, except for those who take the time to build a service around it.
Google and Meta are in the advertising business. Will they sell enough more advertising to justify the stock price? Almost certainly not.
Worryingly, the top 10 companies in the S&P 500 index account for about 40% of the index’s market capitalization, well above the peak of 27% reached during the tech bubble of 1999-2000.
But with top 10 companies making huge profits, a U.S. president willing to lose wars to satisfy financial markets, and a world full of savings looking for a home, the AI bubble will continue to grow.
A crash is coming, but there is no crystal ball to predict its trigger. All that can be said at this point is that all financial market participants are working hard to delay the liquidation date.
