It’s time to prepare for a stock market crash

The stock market’s performed well recently. Despite geopolitical instability, the FTSE 100 index has gained around 5% in 2026.

Looking ahead however, there are risks that are starting to concern me. Given what’s on the horizon, I think now could be a good time to start preparing for a stock market crash.

A worrying new risk

The main risk I’m concerned about is artificial intelligence-related job losses. I believe these have the potential to create some turbulence.

Initially, AI automation’s likely to be good for the stock market. That’s because it’s likely to lead to higher corporate profits.

However, if a ton of people are suddenly out of work, I’d expect consumer spending to plummet at some stage. This could put pressure on a range of companies, from hotel businesses and airline operators to car manufacturers and clothing retailers.

This, in turn, could lead to weakness for stocks. If things start to snowball, we could see a crash.

Not far off?

Now, I’ll point out that I don’t see this as a 2026 risk. To my mind, it’s more of a 2027/2028 issue. I don’t think it should be ignored however. Because things could happen fast.

It’s worth noting that late last month, FinTech company Block – which owns Square – announced it was laying off 40% of its staff due to AI. At the time, CEO Jack Dorsey said that AI has changed what it means to build and run a company and that he expects the “majority of companies” to realise this and make similar structural changes within the next year.

Other companies that have also laid off staff due to AI include Amazon, Dow Inc, and WiseTech. So make no mistake, it’s a trend.

Preparing for a crash

As for what investors can do to prepare for a stock market crash, I think the most important thing is to focus on asset allocation (the mix of asset classes in your portfolio). It needs to match your risk tolerance.

Personally, I’m reducing my equity exposure a little and building my exposure to bonds and cash. This is lowering my risk.

I’ve been burnt in the past by having too much of my ISA and Self-Invested Personal Pension (SIPP) in stocks. I don’t want to make the same mistake again.

By putting some money into lower-risk asset classes, I’ll be more protected from a crash. I’ll also have capital to deploy if incredible buying opportunities start to emerge.

The opportunity

One stock I’d be keen to buy at a discount is defence powerhouse BAE Systems (LSE: BA.). I actually believe it’s worth a look today given the unstable geopolitical backdrop however. If I could pick it up 20%-50% cheaper I’d be thrilled.

Recently, BAE Systems told investors that at the end of 2025 it had an £84bn backlog. So clearly demand for its products – which include fighter jets, battleships and submarines – is high right now.

Looking ahead, the company also said it expects a “new era” of defence spending to drive growth for years to come. With NATO defence budgets rising and a drive for strategic autonomy within Europe, it’s benefitting.

Of course, there are no guarantees that defence spending will remain high. Especially if job losses compromise income tax collection.

I suspect that defence will remain an important theme in the years ahead however.

The post It’s time to prepare for a stock market crash appeared first on The Motley Fool UK.

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Edward Sheldon has positions in Amazon. The Motley Fool UK has recommended Amazon, BAE Systems, and Block. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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