US stocks have pushed upwards since the turn of the year — so have stocks in many markets. But what might have surprised some investors is the rally in tech stocks, particularly those that appear more speculative.
So, why do I think a crash is coming? And can I benefit?
What’s been happening?
To start, US stock have been on somewhat of a bull run in recent months. The S&P 500 hit its 2022 low of 3,491.58 on 13 October, but closed above 4,100 on Wednesday. Meanwhile, the growth-heavy Nasdaq bottomed out at of 10,088.83 in October, only to close above 11,900 on Wednesday.
The case for this bull run is that financial conditions are considerably more welcoming today than they were a year ago. This factor is perhaps most relevant to the resurgence of the tech-dominated Nasdaq.
But it’s clear that money isn’t just going into blue-chip stocks. As analysts have mentioned, this is something of a ‘junk rally’ with investors piling into the highly speculative corners of the market — a Goldman Sachs basket of unprofitable tech stocks is up 28%.
Everything from crypto firms to meme stocks and unprofitable software developers have jumped. Automaker Lucid has seen its share price jump 86% since the turn of the year (down 60% over 12 months). Meanwhile, AI stocks including SoundHound AI have surged along with meme stock AMC Entertainment. These are just a few.
For me, these gains have little to do with underlying company fundamentals and the wider economic reality. The economic backdrop remains highly threatening for growth stocks.
Does this mean a crash is on the cards?
Investors are piling into risky US-listed stocks as they were in late 2021. And that’s concerning because we know what happened next — the bubble burst.
Clearly, investor sentiment seems to be strong right now. The exuberance of the 2021 bull run has returned. And of course, it’s not a given that this unhealthy speculation will disappear any time soon.
However, I’m betting it will. Some of these bull runs just don’t look sustainable, and valuations are once again becoming detached from earnings data.
As such, I’m expecting a considerable correction in US stocks. But probably not all US stocks, instead the trash will crash. And I anticipate this will be contagious, causing even the stocks with better fundamentals to see downward pressure for a short period.
What can I do?
I don’t have a huge amount of exposure to US stocks. In recent years I’ve found better value on the FTSE and I don’t have to concern myself with currency fluctuations.
However, I’m actively avoiding riskier parts of the market. I need to keep my powder dry and if an opportunity arises as a result of a correction, I can pounce. I’ve also earmarked some capital for buying quality US stocks at knockdown prices if a crash does happen.
More specifically, I’ll be keeping an eye on US-listed Chinese EV manufacturers including Li Auto and NIO — both of which I see as highly-promising, and importantly are already revenue-generating.
Equally, if the correction spreads, I’ll be taking a closer looking at Taiwan Semiconductor Manufacturing. Its chips are integral to the green revolution and TSM has a near-monopoly on advanced tech in the sector, although geopolitics is a concern here.
