There’s an old saying — if we knew the stock market was going to crash tomorrow, it would crash today.
And based on what happened to US markets Friday (10 October), has the crash already started? It was the biggest US daily fall since President Trump shocked the world with his massive tariff plans in April.
The S&P 500 lost 2.7% on the day, with the Nasdaq down 3.6%. AI-related companies have accounted for around 80% of US stock market gains this year. Is it time to hit the Sell button?
Panic! Or maybe not
The first thing is… relax. And then don’t read too much into one day’s stock market moves. As I write on Monday (13 October), US stock market futures are bouncing back.
It seems like Friday’s investors were paying more attention to Trump’s renewed tariff threat to China than to JP Morgan CEO Jamie Dimon. It was Dimon who, last week, warned of a 30% chance of a stock market crash within the next six months — or maybe two years.
OpenAI CEO Sam Altman has said he expects some people will lose a lot of money backing AI stock bubbles. But he’s also said: “We are confident that this technology will drive a new wave of unprecedented economic growth.“
Who’s right? The bears who expect losses from an AI slump? Or the bulls who see big AI gains? I reckon they’re all right, to some degree.
2000 all over?
The dotcom bubble bursting in 2000 was scary. And some today see Nvidia (NASDAQ: NVDA) as the Amazon of the AI bubble.
Remember Amazon crashed more than 90%? Let’s not forget that it went on to soar much higher — and even investors buying at the 1999 peak would have enjoyed a multi-bagger if they’d held on.
There’s something very different about Nvidia though — valuation. Never mind the dotcom price-to-earnings (P/E) valuations in the hundreds, or even in the thousands (and that’s for companies with actual earnings). Nvidia currently has a forecast P/E of 42, dropping to around 25 by 2028.
With the kind of growth potential it could have, Nvidia stock doesn’t look overpriced to me. Valuation is, of course, based on forecasts — and those surely reflect the massive AI optimism we see in all the headlines today.
If companies are ploughing too much cash into AI too soon, those forecasts could be excessive. And if they’re lowered, that’s another thing that could trigger a deflation.
Bull or Buffett?
I’m bullish on AI driving Nvidia higher in the long term. But I’m really wary of the cash piling into everything AI right now. I fully expect some of the high flyers to crash and burn. And I fear they’ll drag the quality companies down with them.
I prefer Warren Buffett‘s approach of holding cash and waiting for better future buying opportunities — his Berkshire Hathaway is sitting on around $340bn.
But I’m approaching it like this out of long-term excitement, not short-term fear. And which company do I most hope to be able to buy cheaply in the not-too-distant future? It’s Nvidia, which I firmly rate as worthy of long-term consideration — even with the short-term danger.
