As stock prices in the United States continue to rise unabated, concerns about an impending stock market crash are becoming increasingly prevalent. In May alone, the S&P 500 index registered 11 new peaks, and by June 2, it had reached an impressive 7,600 points, marking the 23rd record high of the year.
This persistent upward trend in share prices raises alarms about the risks associated with investing in listed companies. Many investors display what can only be described as irrational exuberance, suggesting that a significant market correction might be on the horizon. Various factors could potentially trigger this inevitable collapse.
Economic experts have long debated the catalysts of market crashes. Some suggest that sudden shifts in equity inflows or outflows could play a critical role, while others point to excessive leverage, economic downturns, variations in interest rates, or even external shocks. Despite not being an academic or having predictive capabilities, personal experience over nearly four decades in investing suggests a consistent theme: market crashes often occur when stock prices soar to unsustainable levels, becoming detached from economic realities. Historical patterns indicate that when “financial gravity” eventually reasserts itself, stock prices can plummet dramatically.
Currently, one of the most likely triggers for a market downturn is anticipated to stem from the entry of three major private companies into the public domain: Elon Musk’s SpaceX, Sam Altman’s OpenAI, and Dario Amodei’s Anthropic. These firms are expected to launch a portion of their shares onto U.S. markets this summer, with staggering estimated valuations – approximately $1.8 trillion for SpaceX, and around $1 trillion each for OpenAI and Anthropic.
Despite their impressive valuations, these AI powerhouses are grappling with a significant issue: their profitability is limited, with revenues remaining low relative to their prospective market values. A large influx of shares from these predominantly unprofitable ventures could overwhelm both passive and active investors. A reminiscent scenario from the dot-com bubble of 1999 serves as a cautionary tale; an influx of tech stocks during that era precipitated one of the most severe market downturns in history.
Looking forward to a potential market crash, it’s anticipated that high-growth stocks and financial shares could experience the most significant declines. However, within the UK market, one company stands out as a potential safe investment during turbulent times: GSK, the biopharmaceutical giant. GSK is anchored by four key growth areas: respiratory health, oncology, HIV, and infectious diseases. Currently, its shares are priced at 1,894p, valuing the company at £76.8 billion. The stock has seen a substantial increase of 26.8% over the past year and 38.5% over five years, though it remains 17% below its 52-week high of 2,282p. With a price-to-earnings ratio of 13.3 and a dividend yield of 3.5%, many view GSK as undervalued.
While no stock is immune in times of market turmoil, GSK’s diverse portfolio may provide a degree of stability. Investors are left to ponder whether it is wise to invest a sum, such as £5,000, in GSK at this time. Investment experts continue to recommend various stocks, underscoring the importance of strategic decision-making in the current market landscape.
