If you get the feeling that more people are talking about the potential for a coming stock market crash, you’re not imagining it.
As it turns out, there has lately been a discernible increase in news sites and blog posts talking about a possible bearish turn for stocks in the coming weeks and months.
From a seasonal aspect, it’s not terribly surprising that we’re seeing this uptake in investor concerns. After all, August and September have the reputation of being two of the weakest months of the calendar year for equities, and investors collectively suffer from a type of PTSD from past decades where the late summer/early fall period produced a fair share of market downturns.
According to Google AI metrics, the volume of explicitly titled “crash” articles has picked up in just the last couple of weeks. Articles like “Will the Stock Market Collapse in 2026,” “Is the Stock Market Due to Crash in 2026” and “The Stock Market is Sending a Chilling Warning” have seen high visibility on the landing pages of major news sites and search engines, including MSN.com, in recent days.
Adding fuel to the fire is the famous hedge fund manager, Michael Burry, of Scion Capital. In recent days, he has gained some notoriety for warning of a possible 1987-style stock market crash.
[text_ad]
More explicitly, Burry believes the market’s current structure could result in a normal correction morphing into a rapid, self-reinforcing liquidation resembling what happened on Black Monday some 39 years ago. Adding to these concerns, he believes AI stocks are “too expensive,” with capital spending on AI infrastructure reaching dangerously “excessive” levels that could further fuel a crash.
As contrarians, sudden manifestations of bearish sentiment are of interest to us—especially since dramatic spikes in investor fear or bearish sentiment tend to produce a reciprocal effect on stock prices; i.e., when participants become bearish, the market has a way of doing the opposite of what they expect.
On top of the fears related to a bearish stock market, investors are also increasingly worried about the geopolitical situation in the Middle East. Specifically, there’s a lot of talk online about the decline in global oil reserves and the recent jump in retail gasoline prices.
Combine these fears with the seemingly pervasive concerns over a possible economic recession, and we have all the classic ingredients of a healthy “wall of worry” for the stock market. And that, in turn, likely explains the surprising levitation of the major indexes in an otherwise uncertain environment—including the latest new highs in the S&P 500.
And for as long as it persists, the current bearish sentiment should help the market maintain a fair degree of support as the “wall of worry” feeds off the fear and skepticism.
On a related note, many analysts have noted that the extreme price reactions—both to the upside and downside—during the recent Q2 earnings reporting season were likely driven by higher expectations relating to AI spending, but also to “crowded” investor positioning. And the “overcrowding” theme is further feeding into this summer’s bear scare.
Overcrowded stock trades—particularly among the big tech darlings—have indeed been a growing concern lately, as there appears to be a belief among many traders that AI-related stocks can only move in one direction: up. The overcrowding in some of today’s most actively traded stocks also begs the question of whether the market is setting up to disappoint in the traditionally soft month of September.
Providing a measure of support for this thesis, Bank of America’s August fund-manager survey revealed that cash allocations had fallen to a paltry 3.5% of assets, near a record low, while overall equity allocations reached their highest level since November 2021. As a result, BofA’s model recently moved to a contrarian sell signal.
However, on a personal note, I don’t share this sentiment since my assessment of the market shows liquidity is still plentiful enough to likely prevent a major downturn from happening imminently.
Returning to the latest earnings season volatility, it has been said that when investors are heavily invested, there’s less incremental buying power available when a company reports good results. Conversely, even a modest disappointment can trigger profit-taking from a large existing position—precisely the type of reaction we’ve been seeing in several stocks lately.
Incidentally, BofA’s survey currently identifies semiconductors as the most crowded trade, with a net 52% of respondents flagging the positioning (see chart below).
Source: MarketWatch
But here’s the potentially good news: Many, if not most, of the companies undergoing turnarounds or strategic transformations are under the radar of the typical trader and aren’t generally as crowded as the mega-cap AI trades.
And that means that with investors excessively concentrated in the popular winners, less-crowded value stocks can potentially benefit from a likely rotation toward turnaround and value stories (which is our specialty here at the Cabot Turnaround Letter).
[author_ad]
