You can never completely rule out a stock market crash. But I think the chances of a big decline in share prices just got significantly lower in the last seven days.
As I see it, one of the biggest threats to the overall stock market is the artificial intelligence (AI) trade running out of steam. And the last week has been a very positive one on this front.
Hyperscalers
The major cloud companies – Alphabet, Amazon, and Microsoft (NASDAQ:MSFT) – all reported earnings this week. And there was a common theme among them.
All three reported strong growth driven by high demand and all three announced plans to increase their spending. I think this is hugely positive for the stock market as a whole.
Microsoft is one of the best examples. The firm generated 40% revenue growth in its cloud computing business and increased its capital expenditure forecasts.
The market didn’t like this and the stock fell 3% after the earnings announcement. But I think this is a very positive sign for the stock market as a whole.
AI stocks
Right now, AI accounts for a lot of the S&P 500. And with the rest of the US economy finding it hard to generate any meaningful growth, investors are piling into artificial intelligence stocks.
One of the things that could derail this is one of the major cloud computing companies deciding to cut capital expenditures. That would be disastrous for Nvidia and the market as a whole.
Why might they do this? If it looks like the huge investments being made are going to generate weaker returns than expected, the likes of Microsoft might rethink their spending.
Alternatively, if investors get a sense that the investments are speculative rather than meeting existing demand, things could unravel quickly. But the latest results present no sign of this.
OpenAI
It’s clear AI stocks are in fashion at the moment (which is the understatement of the year). And that makes Microsoft’s stake in OpenAI an interesting development.
OpenAI has gone from being a non-profit organisation to a capped-profit one. And this is leading a lot of analysts to think the company might go public in the near future.
Microsoft stands to benefit from this. Its overall returns would be limited by the capped-profit model, but it could still realise a significant return on its initial investment.
The stock looks expensive at a price-to-earnings (P/E) ratio of almost 40. But its growth prospects mean it deserves serious consideration as a potential buy.
Crash potential
The stock market could crash for any number of reasons – a potential AI bubble is just one of them. Other risks include a potential recession and higher inflation in the US.
Those are still very much live and investors need to be ready for a downturn at any time. But the promise of higher capital expenditures seems to have fended off the AI risk, at least for the time being.
