3 reasons why AI could cause a brutal stock market crash

Citrini Research caused a stir in February when it outlined a scenario in which new technologies could lead to a stock market crash of up to 60%. Similar fears, albeit for different reasons, have also been advanced as to why artificial intelligence could be bad news for investors.

Overly dramatic or a realistic prospect? Let’s see.

Doom and gloom

Citrini paints a picture (the firm describes it as a “scenario, not a prediction”) of white-collar workers being gradually replaced by machines.

Unemployment rises (the US jobless rate could hit 10% by June 2028) and wages fall. Consumer spending weakens. A doom loop’s created — or “human intelligence displacement spiral” — with more AI leading to further economic disruption.

With loan defaults rising, banks start to suffer. The whole mortgage system then comes under threat with a property market crash playing a major role in wiping 57% off the value of the S&P 500, compared to its October 2026 peak.

And in the face of falling tax revenues and political instability, governments around the world are unable to do anything about it.

The paper concludes: “As investors, we still have time to assess how much of our portfolios are built upon assumptions that won’t survive the decade. As a society, we still have time to be proactive.”

That’s not all

A second fear surrounding AI is related to events of nearly 40 years ago. The Black Monday crash of 1987 has been partly blamed on automated trading strategies. Four decades later, could AI cause a similar issue?

A third concern is around lofty stock market valuations. Prior to the recent conflict in the Gulf, US equities were trading at record highs relative to earnings. Largely caused by fears of a tech stock bubble forming, some were predicting a market meltdown. Okay, this isn’t the fault of AI itself, but rather, overexuberant investors getting a bit too excited. But it’s another illustration of how technological advances could disrupt the wider market.

Hang in there!

With such a gloomy analysis, it’s tempting to think that it’s time to get out of the market. But I’m not selling up. In fact, I recently topped up my Stocks and Shares ISA. Why?

Well, we’ve been here before. AI is the fourth industrial revolution that the world’s seen. And the previous three didn’t wreak havoc overnight. Of course, there are going to be winners and losers. However, I don’t think everyone’s going to suffer.

The world’s largest

So far, one of the biggest beneficiaries has been – and, I reckon, will continue to be – Nividia (NASDAQ:NVDA).

It’s the backbone of the AI industry as its chips are used by all of the biggest players. However, it produces more than just semiconductors. It sells other essential hardware and software. It even has a venture capital arm.

Of course, the biggest risk to its share price is a failure to continue its amazing track record of increasing its earnings. Any sign of a slowdown and there could be a sharp correction. Also, there are some competitors starting to emerge.

However, for now at least, Nvidia’s dominance looks set to continue. We have yet to reach ‘peak AI’. And as the least replaceable company in the industry, despite its stellar growth, I still think it’s a stock to consider.

The post 3 reasons why AI could cause a brutal stock market crash appeared first on The Motley Fool UK.

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James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia. 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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