Are Global Stock Markets Heading for a Crash?

The world’s financial capitals are gripped by anxiety over the escalating conflict in the Middle East and its potential to ignite a global economic firestorm. As investors fret about the trajectory of the US stock market, it’s worth examining whether we’re witnessing a repeat performance of the 2000 dotcom crash or even the catastrophic events leading up to the Great Depression.

The warning signs are evident: interest rates have been rising, fuel prices are surging, and households and businesses face unprecedented pressure from the cost of living crisis. The US government’s borrowing costs have climbed to their highest level since 2007, while the European Central Bank has raised its policy rate for the first time in years. This toxic mix is sending shivers down the spines of even seasoned investors.

Beneath the surface lies a more insidious threat: the overvaluation of the US stock market compared to its profits. The cyclically adjusted price-to-earnings ratio, or CAPE, has hit its highest level since 2000. Research by Fathom Consulting suggests that for the multitrillion-dollar AI boom to turn a profit, it would need AI-related sales of tech companies involved to rise by between $600 and $800 billion within two years – a feat that appears increasingly unlikely.

The parallels with history are striking: just as investors in 2000 were drawn into dotcom stocks, only to see them collapse when reality set in, so too is the current AI-driven bubble fueling an unsustainable buying frenzy. Adrian Cox’s observation about the British canal and railway booms reminds us that even revolutionary technologies can prove disastrous if financed too early.

Moreover, the South Korean army of traders who have been buying shares on margin – acquiring them with borrowed money – is eerily reminiscent of the small investors who bought stocks “on margin” in the 1920s, only to see their investments vaporize when the market tumbled. This stark reminder highlights that even with hindsight, human psychology and economic fundamentals can be a potent cocktail for disaster.

The current trajectory is not sustainable: markets are notoriously unpredictable, but one thing is certain – the S&P 500 index is only 3% below its all-time high. Investors would do well to heed Albert Edwards’ warning that “these are febrile times.” As interest rates continue to rise and households and businesses struggle with rising energy bills, it’s time to consider whether we’re witnessing a mere correction or an impending crash.

Investors need to be prepared for the worst: the big tech companies – Nvidia, Apple, Google, Microsoft, Meta, Amazon, and Tesla – account for over 20% of the US stock market’s combined value. Their collapse would have far-reaching consequences for global markets. And as AI-related sales fail to materialize, the bubble could indeed burst with devastating effects.

The storm clouds are gathering, and it’s time to take cover.