Experts warn AI could trigger next global stock market crash - here’s what might happen

Synopsis Experts are warning that the stock market could face a big crash because of the high prices of AI company shares. Many believe AI stocks are overvalued, like the internet bubble years ago. Some experts think strong profits may prevent a crisis, but others fear a global market fall could still happen soon. Top economists and financial experts are warning that the stock market might soon crash because of too much excitement around artificial intelligence (AI) stocks. The Bank of England, International Monetary Fund (IMF), and big financial firms said that trading in AI-related companies has become “overheated”, which raises the risk of a global stock market crash. Jamie Dimon, the head of JPMorgan Chase, said there could be a “serious market correction” within the next six months to two years. A “bubble” happens when prices of assets like stocks go too high because of investor excitement, not because of real value. A similar bubble recently happened with weight-loss drug companies like Novo Nordisk, whose stock fell over 50% in a year after the hype ended. According to the report by The Telegraph. Simon Adler from Schroders said, “Bubbles are quite common. Typically they happen within pockets of the stock market, and they can end up losing people a lot of money. What you have less often is a huge bubble across the whole stock market.” Why experts fear an AI stock bubble The AI boom has made tech companies like Nvidia, Microsoft, Apple, Alphabet, and Amazon dominate global markets. These five companies now make up 20% of the MSCI World Index, which has over 1,300 stocks — double the level seen during the dotcom bubble in the early 2000s. History shows that when only a few companies control a large part of the market, it often ends badly. According to investment firm GMO, since 1957, the top 10 stocks in the S&P 500 have usually performed 2.4% worse per year than the rest, as stated in the report by The Telegraph. But since 2013, they have done 4.9% better. Simon Adler added, “There’s been two other periods where the top 10 has done better than the 490 – the dotcom bubble and the Nifty Fifty in the 1960s-70s.” Live Events Experts now fear that AI stocks are overvalued — meaning prices are too high compared to what companies actually earn. The S&P 500 is trading at 23 times forward earnings, while the FTSE 100 trades at 14 times, showing how expensive the US market has become. Another measure, the Shiller price-to-earnings (CAPE) ratio, shows the US market is now in danger zone, crossing 40 for the first time since the dotcom crash. Simon Adler said, “We have reached valuation levels that are incredibly difficult to support even with the most optimistic vision of the future.” He added that AI will change the world, but if investors buy at the wrong price, they could lose most of their money, just like in the 1990s internet bubble. Are AI stocks built on stronger foundations? Some experts believe today’s AI companies are safer than past bubbles because they are profitable and cash-rich, not risky start-ups. As stated in the report by The Telegraph, Jason Hollands from Bestinvest said, “This is a key distinction from the dotcom era. Today’s AI leaders are profitable, cash-rich businesses, not speculative start-ups.” He added that past bubbles were caused by cheap money, debt, and speculation, but AI has grown even during a high interest rate period, funded mostly through equity, not loans. Hollands also said, “Some estimates suggest AI-related spending could hit the $500 billion mark next year, covering data centres, cooling systems and power infrastructure.” How bad could the crash be? Experts say it’s impossible to know exactly when a bubble will burst, but when it does, the market falls fast and hard. A stock market crash means huge losses in days or weeks, like in past crises such as the Great Depression, 1970s oil shock, dotcom crash, and 2008 global financial crisis. Since 1870, the US market has seen 19 bear markets, where stocks fell 20% or more for at least two months. For example, after the dotcom bubble burst, global stocks fell 8% in six months, and 45% in three years. The UK’s worst crash was in 1972, when the FTSE All-Share fell 73% due to the oil crisis and economic collapse. Recovering from such crashes can take years or even decades, depending on how big the bubble is. The Covid-19 crash was an exception — markets recovered in just four months, the fastest in 150 years, according to Morningstar. But larger crashes often take much longer. As mentioned in the report by The Telegraph, for example, Japan’s Nikkei 225 took over 30 years to return to its 1989 peak. Generally, the bigger the bubble, the longer the recovery. After the dotcom crash, US markets didn’t recover until the mid-2010s. Experts say the AI bubble is mainly in the US, so other regions like the UK, Europe, and Japan might be less affected, but nothing is guaranteed. Tom Stevenson from Fidelity said, “During the First World War, while German shares fell by 66pc, those in Japan rose by the same margin... In 2008, US shares fell 38pc, UK 33pc, Germany 43pc, and Japan 41pc.” What investors can do now Experts say investors should not panic, but protect their money by diversifying — spreading investments across different sectors and countries. They should avoid overvalued stocks and stay invested even if the market drops, as long-term patience often pays off. FAQs Q1. Can AI stocks cause a stock market crash? Yes, experts warn that high AI stock prices could trigger a global market crash. Q2. Are AI companies safe to invest in now? Some AI companies are profitable, but many experts say prices may be too high and risky. (You can now subscribe to our Economic Times WhatsApp channel) (Catch all the US News, UK News, Canada News, International Breaking News Events, and Latest News Updates on The Economic Times.) Download The Economic Times News App to get Daily International News Updates. ...moreless (You can now subscribe to our Economic Times WhatsApp channel) (Catch all the US News, UK News, Canada News, International Breaking News Events, and Latest News Updates on The Economic Times.) 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