It’s too early to call a peak in the US stock market, but the signs of one are starting to appear. There’s been growing anxiety that the AI market has become a bubble, and a report out this week from an MIT research lab, which found that 95% of businesses applying AI have yet to see any return from their investment, underscored the worries. It didn’t help matters when OpenAI’s Sam Altman, of ChatGPT fame, added his thoughts that AI stocks were indeed in bubble territory. Following these reports, stock markets fell on Tuesday.

The crypto industry in particular may be the canary in the coal mine of any coming crash. Bitcoin fell sharply. That isn’t itself unusual, given its volatility, but it does bear monitoring because if it continues, it could become self-sustaining. Strategy (formerly MicroStrategy), Michael Saylor’s vehicle for pouring cash into Bitcoin, has tumbled 15% in the past month. On the way up, its rising value enabled it to sell shares, use the proceeds to buy Bitcoin, and drive the price of both up in a virtuous cycle. But if Bitcoin keeps falling and drags Strategy’s price down with it, the company may be forced to liquidate holdings to meet redemptions, causing the virtuous cycle to turn into a vicious downward spiral.

Investors will now be hoping that central banks rush to their rescue and cut interest rates. The Federal Reserve is coming under pressure from the Trump administration to do so, and investors are pricing in a cut at the Fed’s next meeting in September. The problem is that, although the US economy is clearly weakening, the data is not yet sufficiently compelling to suggest it’s at imminent risk of recession.

Meanwhile, inflation appears to be rising. With many economists expecting the hit from tariffs to begin only in the autumn, inflation may rise a fair bit too. Interest rate cuts, which stoke the market, could then add fuel to that fire.

In other words, inflation raises the stakes for the Fed shifting to an easy stance. And even if it does cut, it doesn’t follow that interest rates will fall. Bond yields aren’t declining in tandem with short-term rates because investors anticipate that inflation may return to stay if the Fed eases. If a perception takes hold that the Fed has lost control of inflation, things could get very ugly for both markets and the dollar.

The US may thus be headed into a perfect storm this autumn: a slowing economy, falling asset markets and rising consumer prices, the dreaded stagflation that made life so difficult in the Seventies. Central banks may have to stand by as markets continue falling, awaiting the point that they actually tip the economy into a slowdown sufficient to tame inflation. The danger is that they mistime their move, and a slowdown becomes a recession.

A theme of this year has been that every time institutional investors dumped their US share holdings, retail investors rushed in to buy the dip, driving the market back up. If they return to the market in the coming days, calm may settle for a while. But if they don’t, it may be a sign that the corner has been turned and a recession is on its way. Watch those signs closely, because they’re the tea leaves we can read to predict the autumn tides.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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