Markets don’t collapse on cue

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Whenever the stock market runs as hot as it has this year, its demise is always just around the corner.

Alarms are sounded, and skeptics start talking of a “lost decade” to come.

So when the market starts to wobble, as it is now, many investors fear the end has arrived and the big one is upon them. Semiconductor stocks, which are at the heart of the AI boom, have slipped badly, losing 10 per cent in a single trading day on Friday, while dragging the rest of the market down with them, and isn’t this exactly what the start of another tech meltdown would look like?

But bear markets tend not to arrive on schedule. And there is a very simple reason why.

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It’s rarely the thing that everyone sees coming that fells a powerful bull market. While investors today fret over the known risks, like tariff wars and real wars and the oil supply disruption, it’s the unexpected shock that typically breaks the cycle.

Recent history has given us two excellent examples. Stocks were at record highs at the start of 2020, as well, in the face of rising macro risks. A respiratory virus shutting down the global economy was nobody’s base case, but that’s what took Canadian stocks down by almost 40 per cent in about a month.

Then in 2022, interest rates were widely expected to stay low for years, right up until a wave of inflation forced central banks to jack up policy rates, stopping the stock market boom in its tracks and knocking 25 per cent off the S&P 500 index over the next nine months.

Moments like this call for some humility. Powerful technological forces are unfolding that could support stock prices for years yet. Or maybe the market topped last Thursday before the latest tech selloff and a long winter for investors is just beginning.

I wouldn’t bet too heavily on either possibility.

This latest dust-up looks like one of those resets that happens in the middle of stock rallies for not much reason at all. Chip stocks got overheated, after doubling since the start of the year, and then U.S. jobs numbers were surprisingly strong – one of those good-news-is-bad-news moments for a market weighing the likelihood of interest-rate hikes.

“A correction was inevitable and ultimately healthy if this bull market is going to extend into year-end,” Morgan Stanley chief U.S. equity strategist Michael Wilson wrote in a note Monday.

A true market bust would require some sort of shock that fundamentally changes the potential for profit in the corporate sector.

Right now, the only trends we see in corporate profits are the astronomical kind. The big names of the AI boom are putting up incredible numbers, which is why stock prices have soared while valuations have been held in check.

The S&P 500 index is trading at about 21 times projected earnings for the year ahead, which is actually cheaper than the benchmark index began 2026.

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Still, that’s expensive relative to history. Which is why it’s common to see stock-market-strategist types warning investors that a dark new era is at hand.

Last December, Torsten Slok, chief economist at Apollo Global Management Inc., said “investors should expect to get zero in return in the S&P 500 over the coming decade.” Other big names in the business, such as Bill Smead, Jeremy Grantham and Richard Bernstein, have issued similar warnings more recently.

Often predicted and almost never observed, a “lost decade” for stocks is standard fare for financial doomsayers. You heard the same thing back in 2020, as well as 2022. In both cases, a major shock soon gripped the financial markets, washing away all the excess investor enthusiasm in a matter of months, at most.

Also in both cases, it was not the prime suspects of the moment that ended up killing the bull market. It was the stranger lurking in the shadows.