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Judging by the headlines in mainstream media these days, it’s easy to think a horrendous stock market crash is headed our way sooner or later:
- “Are global stock markets heading for a crash?” – The Guardian
- “This chart says the stock market is ready to crash” – The Telegraph
- “I Predicted the 2008 Financial Crisis. What Is Coming May Be Worse” – The New York Times
But why? A few reasons, prime among them perhaps, the eye-watering sums being spent on artificial intelligence (AI) without a return on investment. The lack of value creation has many parallels to the dotcom ‘boom and bust’.
Valuations are looking very stretched too, – particularly in America, where the Shiller index P/E ratio of 41 is higher than any time in history (other than the 1999 pre-cash period).
Throw in a possible four interest rate rises due to expected higher inflation and we might have a recipe for disaster (rate hikes tend to put the brakes on an economy).
So why hasn’t a crash happened? And is a stock market crash guaranteed, or is this all a load of hot air?
Explaining
I asked ChatGPT for its take on the subject. It gave me its usual overly lengthy exposition, which can be summarised as “yes, valuations are high, but perhaps the earnings eventually justify them”. Though it did offer a couple of illuminating data points.
First, corporate earnings are still strong. Reuters reported that S&P 500 Q2 earnings were growing about 53% year-on-year. Similarly, another piece of analysis put the forward price-to-earnings ratio of the index at around 19. That’s down from the high-20s where it stood only a year or two ago.
Essentially, because of the massive amounts being ploughed into AI, the numbers look good. However, the reports of circular financing among the tech giants worries me. That’s why I’ve got my eye on stocks that can weather the storm of an upcoming AI market crash…
One to consider?
At first glance, a stock such as Diageo (LSE: DGE) seems like an odd investment during an AI revolution. The shares have dropped massively, still down 60% from a high in 2021. The concern among investors is primarily a shift in alcohol consumption affecting the firm’s brands including Guinness or Johnnie Walker.
But looking closer, there’s plenty to like here. The firm’s earnings remain high. Its $20bn revenue last year was derived from sales of products to consumers – not shady accounting tricks. The forward price-to-earnings ratio of just 13 suggests a bargain might be on offer as well.
If we’re in for a spot of economic turbulence, then Diageo might turn out to be a safe haven. Perhaps counterintuitively, sales of beer and spirits are usually unaffected during times of crisis. These defensive properties could make this a sturdy investment should the stock market crash arrive too. I think it’s worth considering
Should you invest £5,000 in Diageo Plc right now?
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John Fieldsend owns shares in Diageo.
This story originally appeared on Motley Fool
