Is a Stock Market Crash Coming

Debt, tariffs, wars, and an AI-fueled stock market makes you wonder when the whole thing collapses. Felix Prehn, a former investment banker, says four hidden forces have prevented a sustained crash since 2008. So what are the forces propping up the market, and what could shut them down?

Is a Stock Market Crash Coming and What Could Finally Break the Market

Key Takeaways

• Four mechanical forces explain why every selloff since 2008 has turned into a V-shaped recovery.
• The Fed cut rates in late 2025 on shaky data and quietly resumed money printing at $40 billion per month.
• Index funds buy on autopilot every pay check cycle, and employment is the one thing keeping the faucet running.
• When algorithms finish selling, they detect stabilisation and flip to aggressive buying with a snowball recovery effect.
• Bond yields above 5% or 6% could pull money out of stocks because investors would prefer risk-free government returns.
• Every major innovation in the last 100 years has gone through a hype crash before delivering real long-term value.
• Oil and gas service stocks returned 48% while the S&P returned 2% in the same period.

Four Forces Prevent a Sustained Stock Market Crash

Why does every selloff recover within days? Felix Prehn tracked the S&P through the COVID crash, the tariff crash, and the Iran scare. Every single one produced a V-shaped recovery.

The reason is not luck. Four mechanical forces catch the market every time it falls. Felix walks through each one and identifies what could break it.

How Fast Can Markets Collapse?

Before looking at the four forces, consider what a real crash looks like. The Wall Street Crash of 1929 saw the DJIA fall 89% from its peak. It bottomed out in July 1932 and marked the onset of the Great Depression. On Black Monday in 1987, the DJIA plummeted 508 points in a single day. The loss of 22.6% was the greatest single-day drop in Wall Street history at the time.

In the 2008 financial crisis, the DJIA fell 54% from a peak of 14,164 to 6,469 by March 2009. One of the most severe downturns in history, it wiped out years of gains. The COVID-19 pandemic caused the DJIA to decline 12.93% on March 16, 2020, the largest point drop since Black Monday.

Felix Prehn describes the kind of crash he means: a “gut-wrenching, 2008-style” wipeout of 30% to 50% that lasts years. The four forces below explain why recent selloffs have not reached the same level.

The Fed Quietly Prints $40 Billion Per Month

The first force is the Fed put. Markets believe the Federal Reserve will step in whenever things get ugly. Rate cuts, money printing, asset purchases. Whatever it takes.

Why does the Fed feel compelled to act? US household wealth, outside the primary home, is 47% in stocks. Total household wealth is around $184 trillion. Roughly a third is directly in equities.

Americans have never been more exposed to the stock market. When equities drop 40%, consumer spending falls off a cliff. A recession follows. Stocks decline even further.

The Fed’s logic is simple: step in early and prevent the spiral. The central bank cut interest rates in late 2025. Felix calls the data behind the decision “fairly shaky.”

The Fed also stopped shredding money. Officials now print $40 billion every month. The official term is “reserve management purchases.” The label sounds so technical nobody pays attention, yet the money still flows into the system.

What breaks the Fed put? Inflation. If the Fed goes full money-printer mode again, prices climb. With oil already expensive and geopolitical tensions everywhere, stagflation becomes a real possibility. Stagflation means high inflation combined with a stagnant economy. The 1970s showed what happens when the Fed fights inflation hard.

Index Funds Buy on Autopilot Every Pay check

The second force is passive investing. Index funds and ETFs now represent 60% of all money in the market. In 2010, the number was 19%.

Every two weeks, tens of millions of Americans receive a pay check. A percentage auto-deposits into 401k accounts. The 401k automatically purchases index funds. No thought. No analysis. No consideration of whether the market is overvalued.

Felix compares the market to a bathtub with a big faucet. Money pours in every week. Selloffs drain some water out, but the faucet never stops.

What breaks the bathtub? Employment. If unemployment jumps from 4% to 7% or 8%, people stop contributing. Worse, they start liquidating 401ks to cover rent and medical bills. The Sahm Rule sets a clear benchmark. A recession has likely begun once the three-month average unemployment rate rises 0.5% above its 12-month low. Stock valuations tend to fall sharply when the rule triggers.

A large generational shift is also underway. The boomer generation is the largest group of investors, and boomers are retiring. Money leaves the bathtub instead of flowing in. Felix’s Wall Street mentors warned him: a long-running playbook can break without warning.

Stocks can stay overvalued because index funds do not care about price. The top seven stocks in the S&P 500 make up 40% of the index. When a 401k buys the S&P, 40% of the money goes into seven companies. The rest spreads over 493 stocks.

Algorithms Flip From Selling to Aggressive Buying Within Days

The third force is computer-driven trading. A massive chunk of daily volume comes from algorithms, usually called CTAs. When stocks go up, CTAs buy. When stocks go down, they sell. No earnings calls. No balance sheets. Just trend-following.

Does algorithm selling make a crash worse? At first, yes. But the selling exhausts itself in days or weeks. CTAs can only sell what they hold. Once the selloff slows, computers detect stabilisation and flip to buying. The snowball effect kicks in.

Hedge Fund Mechanics Slow Down Every Selloff

The fourth force confused Felix until an options market maker explained it. Hedge funds earn from the spread between what they pay and what they charge. When the market drops, hedge funds must buy. The process is automated. The mechanics force purchases during a selloff and slow the decline.

Retail investors now account for about 20% of daily stock volume. The “buy the dip” phrase has been popular since COVID. But when the Iran situation kicked off, nobody bought the dip. Human psychology plays a powerful role in the shift from economic boom to panic. Fear can override every rational signal in the market.

Red Flags the Market May Be Overvalued

When stock prices rise faster than the economy or corporate profits, the market becomes fragile. High price-to-earnings ratios can suggest overvaluation, which may precede a correction. The CAPE Ratio evaluates prices against 10 years of inflation-adjusted income. The historical average is around 17, and a ratio approaching 40 signals a high probability of a major correction.

The Buffett Indicator measures total US stock market capitalisation against GDP. A ratio past 200% historically signals equities are overvalued. The S&P 500’s forward P/E ratio is currently around 22.5, well above long-term averages.

Key warning signs of a crash include extreme valuations, weak index leadership, high interest rates, and surges in insider selling. A bull market requires broad participation. When only a handful of stocks drive the index higher, the market lacks healthy breadth.

Market bubbles are fuelled by cheap borrowed money, especially through high margin debt. A dangerous signal appears when margin debt peaks and declines while the market continues to climb. An inverted yield curve, where short-term bonds pay more than long-term ones, is a famous recession predictor. Actual crashes tend to follow after the curve un-inverts.

Bond Yields Above 5% Could Drain Money From Stocks

The US carries $40 trillion in debt, and the bond market is very powerful. If bond yields reach 6%, why would anyone hold equities? A bond investor can collect 6% with virtually no risk.

Money flows from stocks into bonds. Higher 10-year Treasury yields make bonds more attractive and pull money away from stocks. Credit spreads widen when lenders worry about corporate defaults. The spread tracks the gap between safe government bonds and riskier corporate debt.

The Inflation Trap Could Disable the Fed

If oil prices stay high and Middle East tensions continue, massive inflation follows. Oil is in everything: plastic, medication, food, fertiliser, trucking, packaging. The Fed loses its power during high inflation because lower rates would cause more inflation.

Tariffs add fuel to the fire. The 2025 tariff announcements led to the Dow losing over 1,344 points on the first day. The US stock market lost more than $3 trillion in the aftermath. Tariffs raise costs for businesses and consumers, reduce disposable income, and drag down spending.

JPMorgan raised its recession risk estimate to 60% after the tariff announcements. Analysts warn tariff policies could push the US economy into recession.

Every Innovation Goes Through a Hype Crash

The MAG seven stocks represent 40% of the S&P 500. Much of the current market depends on belief in the AI revolution. What happens if confidence takes a breather?

Felix points to a pattern visible in every major innovation over the last 100 years. Expectations shoot up first. Then reality kicks in. Progress takes much longer than anticipated. Stocks crash during the gap between hype and delivery.

Overvalued tech stocks in the AI sector could trigger a correction if companies fail to meet high expectations. When prices detach from fundamental value, the market becomes vulnerable. Felix is not predicting an AI crash tomorrow. He is pointing out a pattern repeated with every innovation in modern history.

Oil and Gas Stocks Returned 48% While the S&P Returned 2%

How should you position for what comes next? Felix outlines two scenarios.

If the system holds, stay invested. Watch interest rates, monitor what the Fed is doing, and track inflation. Higher rates can slow corporate growth and offer attractive alternative yields.

If the system breaks, hard assets deserve attention. Felix favours precious metals and commodities. Diversification helps reduce risk during downturns. Losses in one area can be offset by gains in another.

Portfolio insurance through options is another tool. Felix says it can be done for almost no cost. He has been invested in oil and gas services for about six months. The S&P returned 2% from October 1st to around February 26th. Oil services returned about 48%.

Coal mining returned about 40%. Pipeline construction stocks delivered roughly 20 times what the broader market produced. Felix did not predict the war. He spotted money flowing into the sector and followed it.

Felix Prehn’s Tips and Insights

• The Fed calls its $40 billion monthly printing “reserve management purchases.” The technical name keeps people from paying attention.
• Passive index fund investing grew from 19% to 60% of the market in 15 years. Autopilot buying creates constant upward pressure.
• Unemployment jumping from 4% to 7% or 8% would flip the passive money machine from inflow to liquidation.
• Boomers are shifting from net buyers to net sellers during retirement. A large source of capital leaves the market over time.
• Algorithms exhaust their selling in days or weeks, then detect stabilisation. Recoveries happen faster than most people expect.
• Hedge fund mechanics force automated buying during selloffs. Most retail investors do not see the extra layer of support.
• Complacency is the real danger. The belief the market will keep rising forever is the most dangerous position for any investor.
• Money flow into specific sectors can reveal opportunities long before a catalyst arrives. Felix invested in oil services months before the war.

Frequently Asked Questions

What is a bear market, and how does it differ from normal stock market fluctuations?
A bear market is a sustained drop of 30% to 50% or more, lasting months or years. Normal stock market fluctuations are short dips recovering in days. Felix Prehn describes the real danger as a “gut-wrenching, 2008-style” wipeout. During a downturn, investors with a long time horizon and a diversified portfolio may benefit from patience.

What is the long term outlook for the S&P 500 index, and does past performance predict the next crash?
Every major downturn since 2008 has recovered through V-shaped rebounds in the S&P 500 index. However, past performance does not guarantee future results. The long term outlook depends on whether the four mechanical forces remain intact. If inflation disables the Fed or employment collapses, recovery could take years instead of weeks.

How do Fed Chair Jerome Powell, trade decisions, and the Iran war affect volatility in financial markets?
The Federal Reserve, led by Fed Chair Jerome Powell, acts as a backstop by cutting rates and printing money. Trade decisions create tariffs and supply chain disruptions. The Iran war scare caused a selloff in financial markets, though the S&P recovered quickly. The risk is a conflict or shock large enough to overwhelm all four forces at once.

What investment strategy works for long term investors during a market decline?
Felix outlines two paths. If the system holds, long term investors should stay invested and watch rates and inflation. During a market decline, hard assets like gold and commodities deserve attention. Investors should consider buying the dip only with cash available and a long-term plan.

How does artificial intelligence spending affect the global economy and growth in the coming months?
AI spending has concentrated the stock market in seven companies making up 40% of the S&P 500. Felix warns every innovation goes through a hype crash before delivering real growth. In the coming months, the global economy could feel the impact if AI confidence slows. Concerns about overvalued tech stocks could trigger a correction if companies fail to meet expectations.

Are investment accounts like 401ks safe during a severe decline, and what are circuit breakers?
Investment accounts auto-buy index funds every pay check. During a severe decline, unemployment is the risk. Circuit breakers and curbs pause stock exchanges during extreme drops. Black Monday in 1987 showed how fast markets can fall without safeguards.

What warning signs do professional investors track, and what is a good rule of thumb for time horizon?
Professional investors and economists track macroeconomic, valuation, and technical signals to assess systemic risk. Key warning signs include extreme valuations, weak index leadership, high interest rates, and insider selling. A rule of thumb from Felix: investment bankers think in two-year windows, which leads to excessive risk. Many businesses and investors benefit from longer time frames.

Where can people find reliable research on stock market risks?
Felix shares education and research through the Goat Academy and Trade Vision. Sources like Yahoo Finance, Motley Fool, and the Washington Post publish daily coverage including the previous day’s closing price. Felix does not rely on news headlines for decisions. He tracks money flow and sector rotation, which helped him capture 48% returns in oil services before the war started.

Watch the YouTube Video about Is a Stock Market Crash Coming

Video published on 28th April, 2026

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