It’s become something of a tradition among “permabears”: regardless of where the S&P 500 or Nasdaq close, they always find new reasons to predict an imminent market crash, similar to the 2008 crisis or the dot-com crash. And last week could serve as a good example of this: although the US market closed mostly in the green, its list of potential “black swans” only grew longer, and at first glance, with good reason.
Beyond the usual warnings about an impending debt crisis — with the national debt approaching $38 trillion, the debt-to-GDP ratio already over 125%, and interest payments soaring past $1.2 trillion annually — as well as concerns about escalating trade wars and their consequences, permabears are highlighting the AI bubble as a potential threat that could weigh on overall sentiment. And they are not alone in raising alarms.
According to the IMF’s latest World Economic Outlook, the surge in tech stocks tied to the AI industry shows striking similarities to the late-1990s dot-com boom. In their view, if high profit expectations ultimately fail to materialize, it could trigger a significant market correction that would affect household wealth and spending, spreading to financial markets in general, something we have already seen signs of.
At the same time, they see systemic risks from a potential AI bubble burst as low, since this wave of tech investment isn’t built on leverage but is largely funded by cash-rich tech giants. So even if valuations tumble, it’s unlikely to spark a banking or credit crisis. As for retail investors, the IMF isn’t too worried about their losses hurting the economy. However, if household wealth drops, people might spend less, which could still have an impact.
Another risk factor resurfacing, at least according to the permabears, is the specter of the “mini banking crisis” from March 2023. This follows Zions Bancorporation’s report of nearly $50 million in losses from bad loans, while Western Alliance faces exposure to high-risk commercial real estate. Regulators reportedly consider relaxing capital requirements to ease the pressure — not a reassuring sign.
And then there’s the tech infrastructure risk. A recent Amazon Web Services (AWS) outage disrupted dozens of major websites worldwide, flashing back to the CrowdStrike meltdown that briefly shook market confidence. Although this time, the big tech names still closed Monday in the green, forecasts of an imminent downturn suggest the story could repeat on a larger scale, with worse consequences.
So, is everything set for a market crash?
There are enough reasons for a pullback. However, some factors could offset those risks and push markets higher. For sentence, a trade deal between the US and China, if it materializes in the coming weeks, could boost confidence. Encouraging inflation data would also help. And, of course, the current earnings season, which has gotten off to a better-than-expected start, could provide additional support.