Is the US stock market heading for a crash? Apprehensions that the steep rise in US tech stocks may be followed by a deep correction are growing.
However, there appears to be a clear divide among market participants and experts on the matter. One section of investors believes that stretched valuations, slowing economic momentum, and the concentration of gains in a few mega-cap tech stocks could trigger a sharp correction in US equities.
In contrast, others argue that strong earnings and AI-driven productivity gains justify the current valuations, suggesting that the US stock market may continue its rally.
The S&P 500 has gained 16% this year so far, while the Nasdaq has surged 20% year-to-date (YTD).
Bubble or no bubble?
It’s a matter of perspective how one sees the US stock market’s valuations. As Arindam Mandal, Head of Global Equities, Marcellus Investment Managers, explains, at the index level, the S&P 500 trades at about 21 to 22 times forward earnings, which is on the higher side by historical standards, but the distribution of valuations is very uneven.
“The ten largest companies trade in the high twenties to mid-thirties on free cash flow multiples once one adjusts for the heavy capex spend now underway. Outside this small group, the picture looks very different. Roughly 70% of S&P 500 constituents have barely moved over the last three to four years,” said Mandal.
“Equal-weight indices, midcaps and high-quality franchises in areas such as industrials, consumer and healthcare still trade at reasonable valuations. In many cases, multiples are below long-term averages even though fundamentals remain sound,” Mandal said.
This gap between the headline index and the broader market is one reason why the noise around an inevitable crash often misses nuances.
After this year’s steep rally, a correction cannot be ruled out, which is a normal feature of equity markets.
A pullback of about 10% to 15% occurs fairly often, so the anxiety around short-term corrections can sometimes be disproportionate.
US macro still in good shape
Despite growing chatter around a slowdown due to tariffs and other factors, the US economy appears fairly stable. While job markets do show some weakness, there is no alarming situation.
“Real wage growth has been positive for a while. Unemployment has drifted higher, but at a slow and controlled pace that can help ease inflation pressures. As long as unemployment stays comfortably below 5%, the economy is not showing the typical signs of a downturn,” said Mandal.
“Household and large corporate leverage is also at relatively low levels compared with the last twenty years. The environment is not without challenges, but it does not appear to be sliding into a deep contraction either,” Mandal said.
Is it the right time to buy US stocks?
Experts suggest adopting a balanced approach rather than trying to take an aggressive stance on either side.
“Reducing exposure to strong technology or AI platforms solely because of recent gains may not always be justified, especially when their competitive positions remain robust. At the same time, concentrating only on these names can increase sensitivity to any disappointment in capex returns or margin trends,” said Mandal.
“A mix of durable, proven franchises along with selectively adding to areas where earnings surprise potential is higher, and valuations are more reasonable, can help navigate this phase,” Mandal said.
Mandal pointed out that several high-quality companies in consumer, select industrials, and healthcare are trading at valuations that look sensible. These kinds of businesses can benefit if the real economy continues to stabilise and if the ongoing investment cycle gradually broadens out to the rest of the market.
Given the uncertainty around interest rates and index level valuations, staggering deployment over time can help navigate volatility.
An ideal strategy could be to invest in a combination of high-quality technology stocks and have selective exposure to reasonably valued sectors
Subho Moulik, Founder and CEO, Appreciate, suggests investors should trim exposure to overvalued pure-play AI stocks while maintaining positions in well-capitalised infrastructure providers with solid fundamentals.
“Rather than completely avoiding US equities or tech, selectivity based on reasonable valuations and proven profitability remains key,” said Moulik.
“The AI theme is real, and tech giants are investing trillions, but history reminds us that not every AI company will succeed. Should consumer-facing AI majors fall, infrastructure valuations will follow. The prudent approach focuses on companies with demonstrated earnings power and reasonable multiples, rather than chasing hype around unproven business models,” Moulik said.
According to Ross Maxwell, Global Strategy Lead at VT Markets, the most practical approach is to avoid reacting to extremes and instead focus on portfolio discipline.
“Trimming exposure if overweight US equities would be prudent, especially in overweight Tech positions. But they should not be looking to fully exit the market or avoid AI-related sectors altogether,” said Maxwell.
Maxwell believes that secular themes, such as cloud computing, cybersecurity, semiconductors, and AI infrastructure, can still offer long-term compounding opportunities even if near-term volatility persists.
Investors should maintain a long-term perspective, avoid emotional decisions, and align their strategy with their risk tolerance, time horizon, and financial goals, Maxwell said.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.