I know a couple of investors who think that a stock market crash in the second half of 2023 is a strong possibility.
While I tend not to listen seriously to such doomsayers, there are a couple of things that I think could send shares tumbling.
These are the deflating of valuations in artificial intelligence (AI) stocks and the onset of a global recession.
As a result, I’m quietly preparing for a potential sharp decline in share prices.
Potential AI bubble
The AI boom this year has boosted the valuations of the so-called ‘Magnificent 7’ mega-cap stocks.
These are Apple, Microsoft, Google parent Alphabet, Amazon, Meta Platforms, Nvidia, and Tesla.
Astonishingly, these companies have a combined market capitalisation of $11trn!
However, most of these stocks are now priced for absolute perfection. For example, Nvidia, which has essentially become synonymous with AI itself, trades at 63 times forward earnings.
Slowing growth at these massive companies could cause the AI bubble — if that’s what it is — to pop. That could drag all stocks down at once.
A deep global recession
The next thing that could cause a stock market meltdown is a collapse in the global economy itself. I don’t have to search far for worrying predictions here, as the general macroeconomic outlook remains bleak.
Lockdowns brought on by the pandemic wreaked havoc on global supply chains, triggering the high inflation we’re witnessing today. This was followed by Russia’s shocking invasion of Ukraine, contributing further to food price inflation.
Then there was the US banking crisis in March caused by rapid interest rate hikes by central banks trying to tackle high inflation.
Amazingly, the UK and US have still not entered a recession (yet). But the eurozone is already in one and China’s post-Covid economic recovery has been lacklustre.
Plus, the Chinese property market is floundering and risks going into a deep freeze. If that happens, the knock-on effects for commodities and the wider global economy could be dire.
Finally, the war in Ukraine is still raging after nearly 18 months. If things escalated there, then that could easily tip the stock market over the edge.
Stocks I’m hoping to buy
Despite this worrying backdrop, I remain optimistic. After all, I’m a long-term investor, so I must be an optimist, otherwise I’d have already sold all my shares.
My way of dealing with the uncertainty is by saving cash and keeping a buy list of expensive stocks that I’d like to buy cheaper.
I’ll give two examples. The first I’ve already mentioned, which is Nvidia. The company dominates the market for AI servers and its advanced chips are the secret behind tools like ChatGPT.
I already hold shares, but I’d sure like to buy some more at a lower price.
The second stock is Judges Scientific — an UK-based acquirer of scientific instrument businesses. It has grown its net profit at a compounded 25.4% over the last five years.
Compared to Nvidia, the company is a pipsqueak, with a market cap of just £626m. However, the stock is still trading on a P/E multiple of 40, which is a little too steep for my liking.
But if these two shares suffer major setbacks during a stock market crash, I’ll be backing up the truck.
