Headlines are increasingly pushing the risk of a stock market crash. So let’s check out the reasons, why we shouldn’t panic, and what we might consider doing about it all.
Over in the US, the S&P 500 has risen 25% in 12 months. The market has been climbing sharply since late 2023 on the back of, yes, the surge in artificial intelligence (AI).
AI stock boom
And here’s the really scary thing. One single stock accounts for 9% of the entire value of the S&P 500 right now. And I’m sure you’ve guessed which one — yes, chip maker Nvidia. Nvidia now has a market cap of a shade short of $5.5trn.
Some illuminating perspective on that might be handy for UK eyes — Nvidia alone is worth around twice the value of all our FTSE 100 companies put together. Illuminating? That’s practically blinding.
Meanwhile, Google’s parent Alphabet has seen its market cap rise to $4.7trn. Between the two, they’re worth more than three and a half Footsies.
Why does Burry Worry?
It’s feeling like the last months of the 1999 — 2000 bubble
— Michael Burry
Hedge fund manager Michael Burry recently told us all he could hear on financial radio on a long driving trip was “absolutely non-stop AI“.
He famously predicted the 2008 financial crisis — and made a packet from it. The founder of Scion Asset Management, he was played by Christian Bale in the film adaptation of The Big Short.
But without downplaying Burry’s credentials, anyone can get lucky predicting a stock market crash once. And they rarely happen when people think they’re going to.
Reasons to be cheerful
We’re relatively isloated from the AI surge here in the UK. Our little FTSE 100 index is on a trailing price-to-earnings (P/E) ratio of 16, with a forecast ratio of 14 based for the next 12 months. That’s pretty much bang on its long-term average.
While I expect a US market crash would give UK shares a shake too, I see enough safety margin to provide resilience.
UK shares recovered from the 2020 pandemic crash impressively fast. And I really can’t see a possible slump in 2026 being anywhere near as painful as that.
What can we do?
I think investors should consider putting a portion of their Stocks and Shares ISA cash into a diversified investment like City of London Investment Trust (LSE: CTY).
The share price is up 40% over the past five years — slightly behind the FTSE 100’s 45%. And we’re looking at an expected dividend yield of 4% — with the index on a forecast 3.3%. Crucially, City of London has raised its dividend every year for 59 years in a row!
If we don’t see a rise one year, I’d expect some share price fallout. And it’ll never be foolproof against a stock market crash.
But I reckon holding an investment trust like this, with widely diversified UK holdings, for the long term could help us worry less about short-term ups and downs. And then look to snap up bargain buys if there is a crash.
Alan Oscroft owns shares in City of London Investment Trust.
