Investors Need to Stop Denying Reality: Burry Believes There Are 9 Months Left Until the Next Crash

The U.S. stock market could crash in the next nine months, according to investor Michael Burry, known as the inspiration for the character in the movie *The Big Short*. Although the S&P 500 index continues to set new records, most of the stocks in the index are trading well below their highs. This divergence points to market weakness, Burry writes in his blog, Cassandra Unchained.

Burry sees an additional threat to the market in the massive investments in AI infrastructure, which are increasingly reliant on debt financing. The investor estimates the total liabilities associated with data center construction, equipment purchases, and leases of unoccupied facilities at $3 trillion. He believes that rising interest rates and problems among lenders could leave these projects without the necessary financing and accelerate the market’s decline.

Before a market crash, investors go through several psychological stages, writes Burry. He currently sees signs of the first stage—denial: investors are ignoring warning signs because stock prices continue to rise. It is during this period, which can last from six to nine months, and sometimes more than a year, that the market reaches its peak, he notes.

A similar situation unfolded before the dot-com bubble burst in 2000. Following Russia’s default and the Long-Term Capital Management hedge fund crisis in 1998, signs of serious trouble began to emerge in the financial markets. In the spring of 1999, the stock prices of some Internet companies, including millionaire.com, began to fall. But the market continued to rise, and Webvan, eToys, Pets.com, and other companies were able to go public a few months later, before their stock prices plummeted. The Fed raised rates three times in 1999 and three more times in the first half of 2000, but this did not halt the Nasdaq’s rise: from October 1999 to its peak in March 2000, it rose by 84%.

Before the 2008 crisis, the first signs of trouble in the credit market appeared as early as February 2007. At that time, credit spreads on credit default swaps (CDS) rose sharply, indicating growing investor concerns about debt defaults. But the S&P 500 did not reach its peak until the fall of 2007, and the stock prices of some companies continued to rise even into 2008. Burry also points out that before the 1929 crash, stock prices rose despite a decline in industrial production, including steel output. In the early 1970s, the stock market continued to rise even after inflation accelerated again.

After the denial stage, in his view, comes “anger”: sharp sell-offs alternate with sharp rebounds. Then the “bargaining” phase begins—investors look for stocks that have fallen in price, try to predict when the decline will end, and the market gradually adjusts to the new conditions.

Burry analyzed the performance of S&P 500 stocks over the past 35 years and found that, typically, at the peak of a bull market, about 20% of stocks are trading at least 20% below their highs. During a bear market, this proportion consistently increases.

Before the dot-com bubble burst, this pattern broke down, the investor writes: following the Long-Term Capital Management hedge fund crisis in 1998, an increasing number of stocks were falling in price relative to their highs, even though the S&P 500 continued to rise. By March 2000, 71% of stocks had lost at least 20% of their value from their highs, and in some weeks, that percentage reached 80%.

Burry is currently observing a similar pattern. According to his calculations, 55% of S&P 500 stocks are trading at least 20% below their highs, and more than 80% have lost at least 10%—the same proportion as at the market peak in March 2000. Half of the index’s stocks have fallen by at least 22.3% from their highs. Over the past 35 years, this figure has been worse only in the run-up to the dot-com bubble burst. Burry believes that the S&P 500’s record highs mask a serious deterioration in the performance of most of its constituent stocks.

Burry sees another threat to the market in the investment race surrounding AI. In his view, Microsoft, Amazon, Google, and Meta are spending enormous sums not to preserve their businesses, but in the hope of gaining control over the artificial intelligence market. These companies aim to create an oligopoly whose influence the authorities will not be able to ignore. OpenAI, Anthropic, and Oracle are also striving to become major players. However, Burry doubts that future profits will justify such expenditures.

The continuation of this investment race depends largely on the availability of debt financing. Burry warns of problems with asset valuation among private equity funds, private lenders, and insurance companies that finance the construction of data centers. The situation is complicated by rising long-term interest rates, while it takes much longer to complete projects and recoup investments. According to Burry’s estimates, the total amount associated with data center construction in progress, pre-leases, and lease agreements for unoccupied facilities reaches $3 trillion. Burry fears that mounting problems among lenders could lead to financing difficulties for data center construction. In his view, this could undermine investor confidence in the prospects of AI—one of the main drivers of the current rally.

Burry has already begun preparing for a possible market reversal. He is looking for opportunities to profit from the recovery of stocks that have fallen sharply in price. According to the short seller’s forecast, once the bull market ends, capital will begin to flow from the current growth leaders to other S&P 500 companies and similar stocks that have remained in the shadows until now.

However, even the most attractive undervalued stocks may suffer at the start of a sell-off, according to Burry. He acknowledges that the market may continue to rise despite deteriorating fundamentals. Therefore, he does not rely solely on his forecast of an imminent crash and continues to base his stock selection on their fundamental value.

Burry also hopes to profit from short positions, for which he now uses only options.

This article was AI-translated and verified by a human editor