Over the past few years, the S&P 500 has been doing something that investors appreciate. It’s roared higher, and this year continues to extend the bull market. In fact, since the start of 2023, the major index has delivered a gain of 100%. This is as investors have jumped at the chance to get in on the latest big thing in technology: artificial intelligence (AI). They’ve bought AI stocks hand over fist, from chip designers Nvidia to memory makers like Micron Technology and cloud service providers such as Microsoft.
These companies and their peers have been generating strong revenue growth thanks to their AI products and services — and that’s prompted investors to get in on these exciting stories. All of this has led the S&P 500 higher, as AI stocks are heavily present in the benchmark. And considering that AI is in its early days of practical use, more growth could lie ahead.
This paints a bright picture, yet some investors have started to worry about what’s next for stocks — and the words “market crash” have even emerged. But here’s some good news: If a stock market crash is coming, history suggests there are two crucial moves to make.
Image source: Getty Images.
Will AI stocks weigh on the S&P 500?
First, let’s consider the potential trouble spots investors are noticing in today’s market environment. And this starts with the area of AI. Though AI stocks have pushed the index higher in recent years, investors worry that they might end up weighing on the index at a certain point. Tech giants are greatly investing in AI infrastructure, and if they overspend, earnings and their stock prices may suffer. Investors have been thinking of this risk — and that’s prompted some to hesitate before buying AI stocks or even sell their positions.
Meanwhile, though the Federal Reserve left interest rates steady during the latest meeting, higher inflation remains a concern, and the market is predicting another hike. In fact, the probability for an increase at the December meeting is at 83%, according to CME Group’s FedWatch tool. A higher interest rate environment generally isn’t favorable for companies, as it lifts their borrowing costs, or the stock market — higher interest rates may prompt some investors to favor bonds over stocks.
Finally, stock prices have climbed, with overall valuations at nearly record-high levels. The S&P 500 Shiller CAPE ratio, a look at stock price and earnings per share, illustrates this point.
Shiller CAPE Ratio data by YCharts
It’s never too early to plan for a market crash
Against this backdrop, some investors worry that a decline — or even a market crash — may be next. Now, it’s important to note that, even if you’re extremely bullish and don’t believe that a crash is on the way, it’s never too early to plan for a crash. These events happen periodically as part of a normal market cycle, so it’s best to be prepared.
With this in mind, what should you do right now? The good news is you can take two steps to favor the growth of your portfolio — and limit the impact of market crashes along the way. The first step is to take a long-term view when investing. This means buying stocks with the idea of holding on for a number of years, five at a minimum. When you do this, downturns or crashes may not even be noticeable in your performance down the road. History shows us the S&P 500 has always gone on to rebound from difficult times, so if you invest in strong companies, you’re likely to see this same pattern.
The second thing you can do right now, and particularly during a crash, is buy stocks. Not just any stocks, but quality players at reasonable or even dirt cheap prices. In a market downturn or crash, you’ll find plenty of them, and while many investors might not be in a buying mood, this actually is the best time to go shopping for stocks. Even if they fall further after your purchase, that’s OK. If you aim to hold on for a number of years, you could score a big win.
So if a crash is coming — sooner or later — you can approach that moment with a cool head. By investing when valuations are down and focusing on the long term, you’re likely to beat any of these tough moments.