State Street model shows only 32% chance of a 40% US market crash in two years

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A State Street Markets model developed with Harvard's Robin Greenwood gives the overall US stock market a 32% probability of a 40% drop within the next two years, only slightly above the five-year average of 26%. Among sectors, information technology is the frothiest with a 45% crash probability, though that is not much higher than its five-year average of 35% and far below the near-100% probability at the top of the internet-stock bubble. The model builds on research published in 2017 that found when a sector outperforms the broad market by at least 100 percentage points over two years, it crashes by at least 40% in the subsequent two years 53% of the time, with the probability rising to 80% when the trailing two-year alpha reaches 150 percentage points. The Nasdaq composite's alpha relative to the S&P 500 at the internet bubble peak was 154 percentage points, implying an 80% crash probability that proved conservative as the index eventually fell nearly 80%. While the current bubble risk appears low, the article notes that other factors such as a spate of mega IPOs and extreme overvaluation still pose significant market risks.

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