Is this the start of a stock market crash?

Global stock markets are experiencing some turbulence at the moment. Could investors be looking at a major decline in share prices?

Edward Sheldon, CFA

Based in London, Edward is a CFA-qualified investment analyst/writer who has clients all over the world. Before launching his own investment writing business in 2017, he spent 15 years working in private wealth management and institutional asset management. Edward takes an active approach to investing, managing his own individual stock portfolio. He likes to invest in high-quality companies that are poised to benefit from powerful long-term trends, and capable of generating market-beating returns. You can find more of his views, along with his portfolio holdings, at topshelfinvestments.substack.com

Published 25 July, 2024 12:41 pm BST

| More on: GOOG

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The stock market’s been volatile recently. Yesterday (24 July), the tech-focused Nasdaq Composite index – which includes well-known stocks like Apple, Amazon, and Nvidia – fell a whopping 3.6%.

Is this the start of a stock market crash? Or is it just a healthy pullback? Here’s my take.

Letting some air out of the balloon

Looking at what’s going on in the market today, my view is that this is a pretty standard pullback.

In the first half of 2024, stocks had had an amazing run. This was especially true for mega-cap tech stocks.

Nvidia, for example, rose about 150% in H1. That’s an enormous gain in just six months.

So a market pullback was always going to be on the cards in the second half of the year. We’re seeing that now.

What’s next?

How long the pullback’s going to last I don’t know. Yesterday’s big fall was partly caused by earnings from ‘Magnificent Seven’ companies Alphabet (NASDAQ: GOOG) (the owner of Google and YouTube) and Tesla, which missed analysts’ estimates in some areas.

So much is likely to depend on earnings from other Big Tech stocks such as Microsoft, Amazon, and Apple in the weeks ahead (these stocks have a huge influence on the market today).

I wouldn’t be surprised to see markets fall another few percentage points as investors continue to take profits off the table and diversify away from tech. We may even go into ‘correction’ territory (meaning a fall of 10% from recent highs).

I’d be very surprised if the stock market was to experience a full blown crash (a drop of 20% from recent highs) though. Because I don’t think earnings from the other Big Tech companies will be terrible.

A buying opportunity?

Alphabet’s Q2 earnings certainly weren’t awful. For the quarter, total revenue was up 14% year on year to $84.7bn. Meanwhile, revenue in its cloud computing division was up a huge 29% to $10.3bn.

The shares fell however, because YouTube ad revenue came in at $8.7bn versus analysts’ forecast of $8.9bn. Investors also didn’t like the fact that the company’s spending on artificial intelligence (AI) was higher than expected.

I reckon the share price weakness here could be an opportunity. With Wall Street expecting Alphabet to generate earnings per share of around $7.60 for 2024, the forward-looking price-to-earnings (P/E) ratio for the stock is only about 23 right now.

I think that’s a pretty attractive valuation for this company. As one of the world’s most dominant technology companies, it’s well placed to continue growing in the years ahead.

Of course, there’s no guarantee Alphabet shares will do well from here. While it’s a leader in the AI space, this technology (ChatGPT) could actually hurt its business model.

History shows that buying this stock on the dip has been a profitable strategy however (it has certainly been profitable for me). So I may buy more shares for my portfolio if the price keeps falling.