Newspaper headlines are increasingly pointing to the risk of a stock market crash. So let’s check the reasons why we should not panic and what we can do in this situation.
In the USA, S&P500 increased by 25% in 12 months. The market has been growing rapidly since the end of 2023, which is of course driven by the exponential growth of artificial intelligence (AI).
AI stocks boom
And here’s the really scary thing. One stock currently accounts for 9% of the total value of the S&P 500 Index. And I’m sure you guessed which one – yes, the chipmaker Nvidia. Nvidia currently has a market capitalization of just under $5.5 trillion.
Some enlightening insight into this topic may be useful for UK eyes – Nvidia alone is worth about twice as much as all our FTSE100 companies taken together. Instructive? It’s practically blinding.
Meanwhile, Google’s parent Alphabet saw its market capitalization enhance to $4.7 trillion. Combined, they’re worth more than three and a half Footsies.
Why is Burry worried?
I have the impression that these are the last months of the price bubble of 1999–2000
—Michael Burry
Hedge fund manager Michael Burry recently told us that the only thing he heard on financial radio during a long trip was:absolutely uninterrupted artificial intelligence“.
He became eminent for predicting the 2008 financial crisis and turning it into a package. Founder of Scion Asset Management, played by Christian Bale in the film adaptation Big shortcut.
But without downplaying Burry’s credibility, anyone can get lucky by predicting a stock market crash at least once. And it rarely happens when people think they will.
Reasons to be elated
Here in the UK we are relatively insulated from the rise of AI. Our little FTSE 100 index has a price-to-earnings (P/E) ratio of 16, with a forecast ratio for the next 12 months of 14. That’s quite high in terms of the long-term average.
While I expect the US market crash will also shake up UK shares, I see enough margin of safety to provide resilience.
UK shares recovered impressively quickly from the 2020 pandemic crash. And I really don’t see the possible crisis in 2026 being that painful.
What can we do?
I think investors should consider allocating some of their Stocks and Shares ISA cash to a diversified investment, e.g. Investment fund of the City of London (LSE: CTY).
The share price is up 40% over the last five years – just below the 45% of the FTSE 100 Index. We are looking at an expected dividend yield of 4% – with the index forecast at 3.3%. Most importantly, the City of London has raised its dividend every year for 59 years in a row!
If we don’t see growth over the course of the year, I would expect share prices to decline. And it will never be reliable in the face of a stock market crash.
However, I believe that having such an investment fund with broadly diversified portfolios of UK shares could lend a hand us worry less about short-term ups and downs in the long term. And then try to take advantage of bargain purchases if a crash occurs.
Alan Oscroft owns shares in the City of London Investment Trust.
