Every couple of decades, investors will ask themselves how long can the stock market keep climbing. Is it safe to buy more shares? Is their pension or equity portfolio vulnerable should financial markets, and especially those in the US, come crashing down to earth?
When stock markets rise to historically high levels – and beyond the level when normal profits can sustain share prices – a few “experts” typically warn of an impending crash.
Many of these experts – City analysts and financial economists – go early with their predictions, only for the market to spend many more years rising. During that time, these experts become discredited and all warnings are ignored.
Today, we are witnessing the same. And again those who warned last year and the year before – about the artificial intelligence boom being, yes, artificial, and corporate borrowing by tech companies being too high – can be found muttering about how their moment of vindication will come.
Investors are now in that dangerous situation of being hardened to anything that gets in the way of pumping more cash into stock markets.
The emphasis in this debate is on the New York stock market indexes – the S&P 500 and the tech-heavy Nasdaq. But it matters for everybody because all the biggest financial shocks of the past 100 years have been visited on the rest of the world by US banks, US investors or US financial markets.
In focus at the moment is the concentration of equity in just seven companies, the Magnificent Seven: Amazon, Alphabet (Google), Nvidia, Meta (Facebook), Microsoft, Apple and Tesla (possibly soon to merge with Elon Musk’s other venture, Space X).
There were signs that investor appetite was waning at the start of the year as many of the seven began borrowing to fund investment in AI.
This loss of appetite for stocks became more severe when Donald Trump started firing rockets in Iran’s direction at the end of February.
Yet the panic was short-lived. The fear of missing out kept most investors in the game. As a measure of how hardened investors had become to expert advice and the potentially ruinous impact of wars, (or threats from higher borrowing, higher interest rates or whatever), it only took for Trump to say at the end of March that he was in talks with Iran for the S&P 500 to soar again.
And last week was no different. More warnings and more stock market gains.
On Thursday, Ludovic Subran, the chief investment officer at Germany’s largest insurer, Allianz, said SpaceX’s decision to borrow money using a $25bn bond sale shortly after raising $86bn from its record-breaking listing in New York, was a clear sign that markets were entering “bubble territory”.
His comments followed those of 87-year-old Jeremy Grantham, famous in the City as the founder and investment adviser of a large asset manager, who said the AI bubble was about to burst and he was selling up.
Dhaval Joshi, the head of global strategy at BCA Research, called the current situation the madness of crowds.
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Citing a study of investment cycles, he said the market works well when it takes in all the available information and processes it to arrive at a conclusion.
Then the situation can change. The study says: “Crowds can go from wisdom to madness when … instead of investors having a range of opinions, their views become correlated. When this happens, either because they synchronise their views or dissenters sit out, the crowd loses the diversity that is the foundation for its accuracy.”
Joshi says he is watching for an economic recession or aggressive rises in interest rates as a more historically accurate trigger for market crashes.
Grantham’s argument is that AI is like the invention of railways or the internet. Everyone overinvests and soon, when they realise it is a utility, such as electricity, they understand there isn’t much money to be made from the invention itself, apart from by those who, over time, build services around it.
Google and Meta are advertising businesses. Will they sell more ads sufficient to justify their share price? Almost certainly not.
It is disturbing that the 10 largest companies in the S&P 500 account for about 40% of the index’s total market capitalisation, which is well above the 27% peak reached during the tech bubble of 1999-2000.
Yet the AI bubble has further to run because the top 10 are making huge profits, they have a US president who is prepared to lose wars to keep the financial markets happy, and the world is awash with savings looking for a home.
A crash is coming, and there isn’t a crystal ball that will foretell the trigger. All we can say at the moment is that everyone in financial markets is working very hard to delay the day of reckoning.