The stock market faces several headwinds, and its elevated valuation could lead to a sharp correction.
Key Points
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The S&P 500 stock market index hasn’t been this expensive since the the dot-com internet bubble in the year 2000.
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The rising inflation rate, interest rate hikes, and some turbulence in the artificial intelligence industry could derail the current bull market.
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History suggests a downturn is likely to be a buying opportunity, and two stocks in particular might be worth picking up at a discount during a market crash.
The S&P 500 index set a fresh record high last week, but cracks are starting to appear in this bull market. A rising inflation rate, interest rate hikes, and even some volatility in artificial intelligence (AI) stocks could set the stage for a steep correction.
The S&P 500 is particularly vulnerable right now because of its elevated valuation. It’s trading at a Shiller Cyclically Adjusted Price-to-Earnings (CAPE) ratio of 41.8, its second-highest valuation ever behind the peak of the dot-com internet bubble in the year 2000. The index plunged by 49% when that bubble eventually burst, and while I’m not predicting a similar decline is on the horizon, I think a sell-off is increasingly likely.
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But history suggests the broader market always trends higher over the long term, so a downturn would almost certainly be a buying opportunity. Here are two stocks investors might want to pick up at a discount if the market tumbles.
1. Cohu: A critical supplier of AI semiconductor manufacturing equipment
Although Nvidia is known for supplying the most important data center chips for developing AI, it relies on third-parties like Taiwan Semiconductor Manufacturing to fabricate them. Cohu(NASDAQ: COHU) supplies testing and handling equipment to the likes of Taiwan Semi, Intel, and Samsung, which plays a critical role in the quality control process.
Cohu’s Eclipse machine handles the most important chips used in AI workloads, including graphics processing units (GPUs), central processing units (CPUs), and high-bandwidth memory (HBM). Eclipse autonomously picks up finished semiconductors after the production process, and places them in test sockets that simulate real operating conditions to ensure they work as intended.
Then there is Cohu’s Neon inspection and metrology platform, which analyzes the physical condition of memory chips. It uses infrared vision and AI software to spot microscopic imperfections in semiconductor wafers, to ensure chips are free from defects before they ship to customers. For some perspective, the average human hair is 70 microns thick, but Neon can identify cracks as small as 1 micron, which are completely invisible to the human eye.
Cohu’s revenue is on track to increase by 35% to $612 million in 2026 (according to Wall Street’s average estimate provided by Yahoo! Finance), which would mark a significant acceleration from the 13% growth it delivered in 2025. Plus, the company has a growing sales pipeline from AI customers which was worth $850 million as of June 30, so it’s working to double its production capacity at its flagship facilities in Malaysia by the end of 2026 to help fill those orders.
Cohu stock has already soared by 180% this year, and it isn’t cheap right now. Although Wall Street thinks the company will almost double its adjusted (non-GAAP) earnings to $1.85 per share in 2027, its forward price-to-earnings (P/E) ratio of 34.5 is a premium to the 22.1 forward P/E of the technology-heavy Nasdaq-100 index. That’s why investors might want to wait for a market correction; if Cohu stock happens to fall by 20% or 30%, it could be a great long-term buy.
2. Upstart Holdings: The future of lending
Upstart Holdings(NASDAQ: UPST) developed an AI-powered algorithm to determine the creditworthiness of potential borrowers. Its models analyze over 2,500 data points on every applicant, making them more accurate than human-led assessment methods which still rely on Fair Isaac‘s credit scoring system. Plus, thanks to AI, Upstart can conduct analysis in real time and make rapid decisions.
Upstart typically doesn’t lend any money itself, except for testing purposes, but rather it gets paid for originating loans on behalf of banks and financial institutions. Management says its underwriting model is now 2.74 times as accurate as a traditional credit model, and it’s constantly improving as it ingests more data. As a result, it will theoretically approve more borrowers and provide them with an interest rate that accurately reflects their credit profile, a winning proposition for both lenders and customers.
During the second quarter (ended June 30), Upstart approved 558,014 loans worth $4.2 billion, with both numbers growing 50% year over year. Unsecured personal loans accounted for $3.6 billion of that total, and originations in the secured category (which includes car loans and home equity lines of credit) grew by 218% year over year to $589 million. This translated to $364.7 million in revenue, up 42%.
But those figures represent a tiny sliver of Upstart’s long-term opportunity. Chairman Dave Girouard thinks AI will replace all human loan assessment methods over the next decade, leaving $25 trillion in global originations and $1 trillion in fee income up for grabs every year. Upstart is in a great position to capture significant market share as one of the early leaders of the AI transition.
Upstart stock is trading at a price-to-sales (P/S) ratio of just 2, which is a steep discount to its three-year average of 5.4. It might be a great buy right now because it’s already cheap, but if a correction in the broader market sends the stock even lower, that could be a golden opportunity for investors to pounce.
Should you buy stock in Cohu right now?
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intel, Nvidia, Taiwan Semiconductor Manufacturing, and Upstart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.