The crash in the USA is no longer a distant economic scenario; according to the Economist, it is only a matter of time.
And while most experts assure that a classic financial catastrophe is not imminent, reality may prove even more explosive: an “atomic bomb” that will shake the foundations of the global economy.
The most worrying, however, is that despite the clear signs and warnings, the world is not prepared for what may follow.
Market euphoria, excessive reliance on Artificial Intelligence (AI), and the valuation bubble create a fragile balance that can be overturned by a single spark.
Specifically, according to the Economist, if the American stock market collapses, it will be one of the most predictable economic explosions in history.
From bankers to the IMF, everyone has warned about the outrageous valuations of American technology companies.
Central bankers are preparing for economic tremors; investors who became famous by betting against subprime mortgage loans in 2007–09 have returned for another “big short.”
With every sign of instability, such as the recent small weekly decline of the NASDAQ technology index, speculation grows that the market stands at the edge of the cliff, and not without reason.
The cyclically adjusted price-to-earnings ratio of the S&P 500, driven by the seven “magnificent” tech giants, has reached levels unseen since the dotcom bubble.
Investors are betting that massive spending on AI will pay off.
However, the numbers are frightening. For companies to achieve a 10% return on AI investments projected through 2030, they will need total 650 billion dollars in annual AI revenues, an amount equivalent to more than 400 dollars per year from every iPhone user, according to JPMorgan Chase.
History shows that such high expectations are often initially disappointed by new technologies, even if they eventually change the world.
However, although a stock market collapse would surprise almost no one, few have considered its consequences.
This is partly because the likelihood that a major drop in stocks will cause a widespread financial crisis is, for now, small.
Unlike the late 2000s, when widespread leverage and complex financial engineering contributed to a debt bubble in subprime mortgages, today’s AI euphoria has been financed primarily with equity.
Additionally, the real economy has shown in recent years that it can withstand shocks, from Europe’s energy crisis to US tariffs, remarkably well.
Recessions are becoming increasingly rare.
Nevertheless, it would be a mistake to believe that the impact of major stock losses would stop at investors’ wallets.
The longer the boom lasts, the more opaque its funding becomes.
And even without a financial Armageddon, a dramatic stock-market plunge could ultimately bring the so-far resilient global economy to its knees and push it into recession.
The root of vulnerability is the American consumer.
Stocks account for 21% of the wealth of American households, about one-quarter more than at the peak of the dotcom bubble.
Assets linked to AI are responsible for nearly half of the increase in American wealth over the past year.
As households became wealthier, they began to feel comfortable saving less than before the COVID-19 pandemic (though not as little as during the housing bubble).
Stock decline
A stock market collapse would completely reverse these trends.
We estimate that a stock drop equivalent to the bursting of the dotcom bubble would reduce the net worth of American households by 8%. This could trigger a significant contraction in consumer spending.
According to an empirical rule, such a decline would correspond to 1.6% of GDP, enough to push America, where the labor market is already tested, into recession.
The impact on the consumer would be far greater than any potential reduction in AI investment, much of which concerns microchips imported from Taiwan.
This shock, combined with weaker American demand, would spill over into Europe, with its low growth rates, and into deflationary China, intensifying the blow for exporters already affected by the tariffs of President Donald Trump.
And because foreign investors have exposure of 18 trillion dollars to American stocks, a global, albeit small, wealth effect would be created.
The good news is that a global recession triggered by stock markets does not need to be deep, just as the downturn that followed the dotcom crash was mild and even avoided by many major economies.
Importantly, the Federal Reserve has ample room to cut interest rates to stimulate demand, while some countries would respond with fiscal support measures.
However, a recession would reveal the weaknesses of today’s economic and geopolitical landscape, further weakening American hegemony, undermining government budgets, and sharpening protectionist reflexes.
Without the AI “boom,” the American economy would look like it did in the spring: threatened by tariffs, with institutions under pressure, and a political scene increasingly polarized (as this went to press, the longest federal-government shutdown had just ended).
In a recession, America usually acts as a safe haven.
However, under these circumstances, and with America facing the biggest downgrade in growth prospects, a flight to the dollar, which has fallen by 8% this year, would not be at all certain.
Although a weaker dollar would be a blessing for the rest of the world, where a rising dollar tightens financial conditions, it would strengthen the perception that American “exceptionalism” is not what it once was.
The risk to the dollar would be particularly significant given that 2026 may see far greater political influence over the Federal Reserve, as explained in the annual feature The World Ahead 2026.
A recession would also place the heavily indebted governments of the world under severe fiscal strain.
Central banks would cut interest rates, easing the servicing costs of the developed world’s massive debt, which stands at 110% of its GDP.
But deficits would widen, as social spending would increase and tax revenues would fall.
In the most vulnerable economies, fiscal concerns could cause long-term bond yields to remain high or even rise while central banks cut short-term rates, a dynamic seen at times over the past two years.
It is hard to imagine markets giving countries like France or Britain much room for new stimulus measures.
The final consequence would concern trade.
A drop in US consumption would almost certainly shrink the trade deficit, something that would please Mr Trump.
With markets under strain, the White House would also be less aggressive on trade issues.
However, the other major point of tension in global trade, China’s surplus in industrial goods, would worsen.
Already, European and Asian manufacturers must compete with a glut of Chinese products, which is increasing as China exports less to the USA.
A slowdown in the American economy would cause this oversupply to swell further, intensifying the protectionist wave.
“The world may be able to predict a collapse of the American stock market.
But that does not mean it is prepared for the consequences,” concludes the Economist.
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