Stock market crashes are impossible to accurately predict, but investors are always interested in when the next one’s coming. And the last fortnight might have pushed us closer to the edge.
But I think there’s an upside to this. Let me explain.
The AI problem
There are lots of things that could cause share prices to fall dramatically. Yet the biggest of them at the moment is artificial intelligence (AI) and I think this looks like a real problem.
Meta, Microsoft, Alphabet, and Amazon have all announced progressively higher capital expenditure plans for 2026. In other words, they’re going even bigger on their AI spending.
There was already scepticism about whether this is going to pay off. And the stock market’s general reaction to the news suggests there’s still concern about an AI bubble.
Even if they’re right though, AI growth could still spell problems elsewhere. Both the US and the UK economies rely on high employment to drive strong consumer spending.
If AI really does take off, it looks likely to threaten a significant number of jobs. And in that case, the rest of the stock market could be in big trouble if employment falls and spending drops.
History lessons
When it comes to stock market crashes, the lessons of history are relatively clear. Investors who own – and continue to own – shares in high-quality companies tend to do well over the long term.
The so-called ‘Nifty Fifty’ was a collection of US stocks that investors thought were infallible. But they fell sharply during the 1973-74 stock market crash.
Some never recovered, but the ones that did more than made up for it. According to estimates, a $1,000 investment in Philip Morris from 1972 would be worth around $43,000,000 today.
Even if all the others had gone to zero, someone who bought all 50 before the crash would have done very well, over time. And that’s what I think investors need to remember in today’s market.
What to do
The lesson of the Nifty Fifty resonates with me. So I’m trying to build my own collection of high-quality shares that I intend to hold onto whatever happens with the wider stock market.
One of the stocks I’ve been buying is Brown & Brown (NYSE:BRO). The firm’s an insurance broker for businesses that are too big for their local broker, but too small to interest global operators.
Its big advantage is its scale. This allows it to attract better rates from carriers and offer its customers the kind of value they can’t get anywhere else.
It also works the other way around – having more potential customers incentivises carriers to offer Brown & Brown better rates. And I think that amounts to an extremely strong long-term advantage.
Investing risks
Even with the best companies, investing in the stock market always comes with risks. The Nifty 50 is a good example of this – a lot of strong businesses never recovered from the related crash.
With Brown & Brown, the main thing that concerns me is the prospect of customers consolidating or going out of business. And AI automation might make that a real possibility.
I can’t guarantee that all of my investments will work out. But what I can do is build a diversified portfolio to give myself the best chance of having the ones that do make up for the ones that don’t.
