The 3 Causes of a 2026 Stock Market Crash

Nobody ever wants to think about a stock market crash or an economic collapse. They're obviously very painful times but we also need to weigh up the reality that in 2026 it is a genuine possibility and I don't say that it's clickbait, I don't say that to fearmonger, I say it because right now we're at a very strange moment. The height that the stock market is at today reflects very high expectations. With Ashila P around 40 investors are already paying a premium on current performance to own these companies but on the flip side while the market is roaring ahead of current performance these high-flying businesses and the broader economy face some very hefty downside risks that are all coming due in the next 12 months and if you've got the stock market way up here but then things slip to here well you've got a big problem. The way I kind of describe it is in 2020-2021 we're walking on a path, in 2022 up until now we've kind of been walking on a plank and now heading into 2026 we're walking on a tightrope. Now for sure people have walked the tightrope before it might all work out fine if everything stays calm but if even one of these risks flares up well suddenly the house of cards comes crashing down. So in this video I want to talk through the three factors that could trigger a downturn in the next 12 to 18 months and I want to talk you through what you can do to ensure that you don't get caught out. Now the first factor which would very quickly crash the US stock market is actually something totally out of our control and that is China going to war with Taiwan and believe it or not that conflict which would be happening 7,800 miles away from the stock exchanges in New York would likely have an immediate impact. Why? The US is very dependent on Taiwan for semiconductor chips. Now I made a video on this recently but one big problem the US is trying to desperately fix right now is that all of the world's most advanced chips, the ones that NVIDIA is selling, the ones Apple is putting in their iPhones and their MacBooks, the ones powering the magnificent seven companies to new heights, well all of these chips are made in Taiwan by one company called TSMC and here's the thing, TSMC is the only company that can make the world's most advanced chips at scale and I'm not even kidding. Samsung can do it but not particularly well and the tricky thing is that 80 to 90 percent of TSMC's production happens in Taiwan. Yes they're trying to move that over to Arizona but that's a long way off from pumping out the super advanced chips they already make in Taiwan. So if China were to attack Taiwan things get very hairy and it would almost certainly draw America into the conflict due to the importance of these chips in our modern day economy because China would take Taiwan by force, you can bet your bottom dollar they won't be allowing TSMC to send their shipments of chips over to the US. I reckon the fact that TSMC is located in Taiwan is probably a large part of China's motivations in the first place. So ultimately what would this mean? Well even if China hasn't taken over Taiwan but there's just conflict around the island, it already becomes extremely difficult to get shipments of these advanced chips over to America as shipping lanes will just disappear, they'll dry up and the flow-on effect will be that Nvidia won't get their chips, Apple's processors dry up, AMD can't do their thing, Qualcomm are stuffed, AWS, Google, Meta, Microsoft, Tesla, these guys are all customers of TSMC and interestingly a lot of those companies are also the same players that have had their valuations bid up to the skies in the AI mania we've seen over the past few years. Now again I'm not saying this will happen but if it does it could trigger a massive market correction as these companies that are expanding off the back of these chips, well they'd suddenly have their supply totally choked and we shouldn't dismiss this as some far-off hypothetical, we know that as we speak China is actively building specialized new landing ships, they are running large-scale military drills around Taiwan and commissioning around 70 new commercial ferries designed to carry troops and armored vehicles scheduled for completion by the end of 2026. So that's the first crack that could potentially bring markets down in 2026. But next up I want to talk about a factor that's naturally quite political and that is the possible replacement or very likely replacement of U.S. Federal Reserve Chairman Jerome Powell which is happening in May of 2026. Now we know that Jerome Powell and Donald Trump have not seen eye to eye for a very long time, Trump has been very vocal about wanting interest rates slashed, it's obviously very politically favorable as lower rates juice up the economy, borrowing gets cheaper, you know markets go up, politically that's a home run for him. But Powell on the other hand has been doing the responsible thing, he's kept rates where they need to be based on the balance of risks in the economy, not too high, not too low, just steady enough to keep inflation under control without completely kneecapping the economy. But here's the issue, Jerome's term is up in May 2026 and Trump gets to appoint the next Federal Reserve Chairperson. Now as of recording we currently don't yet know who that is, it's tipped to be this guy Kevin Hassett, but we will likely find out for sure in the coming weeks. Now if you've been following the news you'll know that Trump is only interested in appointing someone with the strong opinion that the U.S. should lower interest rates steeply and while the Fed Chair is only one decision maker out of a panel of 12, there is concern that if the new Fed Chair does exert influence and the FOMC does start bringing down rates unnecessarily, this could spark another massive wave of inflation. Inflation which is still 50% above the Fed's long-term target at the current time. Now to be clear the lowering of interest rates would not be the thing that brings down the stock market, in fact valuations often rise as interest rates are lowered. The thing that would hurt the stock market is the response that would likely be needed if inflation spiked back up again. You would either need to raise rates sharply again which chokes up borrowing and growth in these big name companies, just look at the stock market during 2022, or if Trump does exert his influence and they just keep rates low just no matter what, well inflation will likely start running away from them and that's when people start losing faith in the stability of the currency. Now if that were to happen, that is a really big problem globally as the US dollar is the world's reserve currency and if the global economy started seriously losing faith in the US dollar, that's Armageddon. Now to be clear, I do think this whole point around a new Fed Chair is less likely to impact the market in 2026 than these other points we're talking about because the Fed Chair is just one of the decision makers out of 12 and the other 11 still seem to have their heads screwed on, but it is worth watching nonetheless because it could shift markets. Okay and that brings us to the third and in my opinion the most probable cause of a potential stock market crash in 2026 and that is an AI slowdown. Now I've spoken about this a lot in the past 12 to 24 months but since the current bull market began in October 2022, roughly 75% of the gains in the S&P 500 have come from just seven stocks, Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla. Those companies, the Magnificent Seven, have now a combined market cap of around 21.5 trillion dollars and account for more than one third of the S&P 500 index. Think about that for a second, 1.4% of the companies in the index make up at the moment around 35% of the weight and this enormous rise in the market capitalizations of these companies has of course been down to investors getting very excited about how much growth AI is going to bring to each business. Now I want to explain this by talking about a very commonly quoted metric, the PE ratio. Now a lot of people say that this is an easy way to value a stock. Stock price divided by earnings per share. So normally PE ratios sit in the 16 to 20 range. So if the PE ratio is way higher than that, like Nvidia at a PE of 45.50, then it's said to be expensive and if it's lower than that normal range, like Volaris, a Monash per price stock with a PE ratio of 10, then it's said to be cheap. But in reality, the PE ratio does not tell you anything about the company's valuation, it actually tells you about investor expectations. So in the case of Nvidia, investors are expecting a high level of growth in their earnings over the next few years which will lower the PE ratio back to normal levels. And on the flip side, investors currently aren't expecting much from Volaris, so they simply aren't willing to pay a decent price for where the earnings currently are. Now here's the thing, all seven of these big AI companies, Nvidia, Meta, Apple, Amazon, Google, Tesla, Microsoft, they all have quite high PE ratios. Nvidia and Tesla are the standouts, but look at the lowest, the lowest is Meta at a PE still of 29. Now, what does this mean? Well, it means that investors are expecting a lot of growth, but if they don't get it, these valuations will be completely re-rated. And here's the thing, growth today might not be what it used to be. This is something that Michael Burry has been talking about a lot lately. If you look at the year-over-year growth rates of Amazon's cloud segment, Google's cloud segment, even Microsoft's cloud segment, the average growth rates between 2018 and 2022 were quite a bit higher than the more recent figures that have been posted in the 2023 to 2025 period. Now, this is interesting because at the same time, you've got an incredible amount of money being invested in the AI space by these companies. Microsoft, for example, recently reported a record capital expenditure of nearly $35 billion in the quarter and warned that spending is on the up this year. But if all these companies are spending increasing amounts while growth is slowing, that's not a good recipe. You see, normally what you'd see in a company is you first build some sort of value, then once that's making money for you, you reinvest that capital and that helps you scale. But what we're seeing with all these AI programs today from the Mag7 companies is you take the profits from your core business, then you burn it all on AI CapEx, and then you hope that that provides you long-term value. Now, this can work, but it's not ideal. So far, investors are going along with that thesis. Well, to be completely honest, they're totally infatuated by it. But if that doesn't materialize, then these stock prices will get severely re-rated. And with these companies accounting for 35% of the S&P 500 index, like I said, that would bring down the whole market. The Wall Street Journal recently released an article talking about exactly this idea titled AI is making big tech weaker, where they talk about how Amazon, Google, and Microsoft collectively have spent over $600 billion across the past three years. But if you look at their cash flow statements, all three are set to report lower free cash flow this year versus last when you consider all their expenses related to AI and data center investment. The Wall Street Journal summarizes the situation at hand really well. They say, this setup can be highly profitable if everything works out, but it comes with new risks, including the potentially large cost of underutilization of AI infrastructure should demand fail to materialize. So overall, they are the three big and very real risks we face across the next 12 to 18 months. But the question is then, what can we as long-term investors do about it? Well, the main thing is to stay rational and keep investing from the bottom up. So bottom up investing is simply when you judge each company on its own merits, as opposed to looking at the macro landscape and making decisions that way from the top down. This is what Warren Buffett famously did a write-up about in Fortune back in 1999. At the time, the internet companies were still rising to new heights. But in this article, Buffett essentially said that he was not buying the theme, he was not speculating in the high flies. In fact, he was just looking for undervalued companies with really wide moats. Rule number one, don't lose money. He was buying things like Geico and Genree, not the Microsofts, the Amazons, the Ciscos. And that's a good playbook for today. It's okay to let the AI companies through to the keeper if you feel like you're not getting a good deal. Interestingly, outside of those businesses, there are lesser followed companies that can be found at reasonable prices. Take Monish Prabhari, for example. His 13Fs across the past few years have been all about unloved oil and gas businesses. Now, I'm not saying to go out and buy these companies as well, but there are many pockets outside the mega cap AI companies where you can get solid businesses with strong cash flows trading at fair or discounted prices. So, that's the first point. And then the other point is to just be prepared if something does happen. As Buffett says, when it rains gold, you want to stand outside with a wash tub, not a thimble. So, having a bit of a cash buffer, like what Warren Buffett is currently doing, is a really great strategy right now to capitalize on potential opportunities that might come our way in the next couple of years. So, overall, they are the three big market risks that we face over the next 12 to 18 months. I hope you enjoyed the video. Please leave a like on it if you did enjoy it and subscribe to the channel if you haven't done so already. But with that said, guys, thanks very much for watching. Let me know what you think down in the comment section below. I'd love to hear it. Do you think we'll face any of these challenges across the next 12 months or do you think we'll see the next 12 months be a continued surge in the market thanks to continued AI speculation? Let me know. But apart from that, thanks for watching. I'll see you guys in the next video.