Is the Stock Market fundamentally broken by passive investing?

Sorry for the very long question. I have been thinking about this for a while and I want to know if this makes sense of if it's just crap.

I think there are many things breaking the stock market right now, many of them are well-known (inflation, oil shock, AI bubble) but I feel a far more general irrationality right now in the market, which I hear pretty much nobody talk about.

So, firstly, in the last 2 decades there has been a massive increase in passive investments. So many people store their money in Vanguard All-World or S&P500 or whatever generic ETF which is just supposed to follow the market. Many people do this passively, have a monthly sum automatically deposited without any manual action. I think this fundamentally ruins the markets in several ways.

First of all, people investing passively are not picking stocks. They're not looking at the valuations, they're not looking at the earnings. It's just "do whatever the market does, it'll probably be fine". I wonder if we have passed a point where the amount of money "following" the market has become far more influential than the amount of money actually looking at earnings. Most institutions are probably also just following the market since everybody knows it's madness to try and beat it yourself.

This is combined with the rise of algorithm trading, which is probably another substantial part of the people who are still trading actively. They just parse news and try to act on it as quick as they can. While in normal circumstances that does seem to make sense, Trump and companies have clearly started to take advantage of this, by flooding the airwaves. This is also the reason for all these fake announcements.

This all leads to an incredible amount of money in the market essentially following themselves in a circle, and there is a huge inflow of money every day to do this same thing.

Now, this all leads to something for which I don't quite have the right vocabulary, and don't know enough about economics and financing to know if I'm right at all. The stock market is measured in dollars. We often forget this, because we look at percentages up and down, but it represents the value in dollars. If the amount of money in a system grows very hard, money should lose it's value correspondingly. What is happening in the stock market is that there has for decades, since the Great Recession and maybe longer, been a massive amount of inflation, but just in the stock market. There is a massive amount of money which is just circulating there, only increasing. This is not measured in inflation, since those measure normal products, not stocks. A dollar in the stock market is losing value far quicker than a dollar outside of it.

What I fear is that in the event of a recession, people will stop depositing money passively. They might even withdraw money, to buy gas, to pay rent, to buy tomatoes. If this happens, all that money, all the quantitative easing and extra money, will finally be released, decades too late, into the economy as a whole. This will lead to a massive crash in the stock market, since people are thinking "hey that dollar over there is far less usefull than a dollar here", which will lead to massive inflation in a very short time span. Suddenly all the money captured in the stock market gets released all at once.

Can anyone tell me why this is wrong? What am I misunderstanding, what mistake am I making? I would assume I'm not the smartest guy on the planet and if this is true more people should already have reached this conclusion.