THE American stock market has see-sawed lately amid a flare-up in trade tensions, but remains near its all-time high. The surge, fuelled by enthusiasm around artificial intelligence, has drawn comparisons to the exuberance of the late 1990s that culminated in the dotcom crash of 2000. Though technological innovation is undeniably reshaping industries and increasing productivity, there are good reasons to worry that the current rally may be setting the stage for another painful market correction. The consequences of such a crash, however, could be far more severe and global in scope than those felt a quarter of a century ago.
At the heart of this concern is the sheer scale of exposure, both domestic and international, to American equities. Over the past decade and a half, American households have significantly increased their holdings in the stock market, encouraged by strong returns and the dominance of US tech firms. Foreign investors, particularly from Europe, have for the same reasons poured capital into US stocks, while simultaneously benefiting from the US dollar’s strength. This growing interconnectedness means that any sharp downturn in American markets will reverberate around the world.
To put the potential impact in perspective, I calculate that a market correction of the same magnitude as the dotcom crash could wipe out over US$20 trillion in wealth for American households, equivalent to roughly 70 per cent of American gross domestic product in 2024. This is several times larger than the losses incurred during the crash of the early 2000s. The implications for consumption would be grave. Consumption growth is already weaker than it was preceding the dotcom crash. A shock of this magnitude could cut it by 3.5 percentage points, translating into a two-percentage-point hit to overall gross domestic product growth, even before accounting for declines in investment.
