Why do stock markets crash? As a survivor of the October 1987, 2000-03, 2007-09 and spring 2020 crashes, I have some idea.
For me, the main reason why share prices plunge is excessive exuberance producing over-valuations and a market bubble. This could be happening today in one huge market sector in the US.
The stock market surges
So far in 2023, the S&P 500 has leapt by 14.9% in under six months. This puts the US index well on track to record one of its best half-year results since 2000.
When I look for explanations for such a strong rise in stocks, I don’t see enough good news from the US economy. Though inflation is falling, it’s still much higher than the Federal Reserve’s target of 2% a year.
Also, rising interest rates have sent mortgage costs soaring, hitting the housing market. Bad debts and loan losses are rising, especially among lower-quality borrowers. In addition, there’s the ongoing risk of the US economy entering a recession.
MAMATAN lifts the whole market
However, the one thing that really makes me anxious that the US stock market could crash is the incredibly narrowness of this latest rally.
The vast majority of the S&P 500’s gain this year has come from just seven tech mega-caps. I use the acronym MAMATAN to describe them, short for Microsoft Corp, Apple, Meta Platforms (formerly Facebook), Alphabet (owner of Google), Tesla, Amazon and Nvidia.
Here’s how each of these seven super-stocks have soared this year, plus their one-year and five-year returns (excluding cash dividends). My table is sorted from largest to smallest gain in 2023:
| Tech stock | 2023 gain | One year | Five years |
| Nvidia | 192.1% | 157.7% | 580.5% |
| Meta | 133.5% | 78.9% | 39.3% |
| Tesla | 111.5% | 9.9% | 1071.5% |
| Amazon | 49.4% | 15.5% | 46.3% |
| Microsoft | 44.5% | 36.6% | 245.2% |
| Apple | 42.3% | 36.1% | 300.0% |
| Alphabet | 40.0% | 10.8% | 111.3% |
All seven stocks have produced positive returns to investors over all three periods. Over the past year, gains range from 40% at Alphabet to almost 200% at chipmaker Nvidia. Overall, the average rise this calendar year is an impressive 87.6%. To me, that seems almost unbelievable.
Remember the 2000-03 stock market crash? I do
What’s driven these MAMATAN stocks to new heights? Currently, the #1 market narrative is the huge opportunities that generative AI (artificial intelligence) presents to top tech firms. If OpenAI’s GPT-4 is anything to go by, AI could be the next big thing for the tech industry.
But I fear that the hype surrounding AI has pushed these stocks too far, too fast. Indeed, I already consider Nvidia and Tesla to be into bubble territory. And we all know what happens when bubbles burst, right?
From its 2000 peak to its 2002 low, the tech-heavy Nasdaq Composite index lost nearly four-fifths of its value during the dotcom bust.
While I’m not expecting a stock market crash on this scale, this MAMATAN-driven surge might eventually turn to slump. Of course, I could be wrong, as rising future earnings from these formidable firms could help to support higher valuations.
What’s more, I’m not afraid of falling share prices. In fact, as a buyer of stocks for the long term, I welcome better bargains through lower prices. Also, some of the largest gains I’ve ever made came from buying when prices were collapsing during market crashes.