With the November US presidential election just around the corner, predictions of a stock market crash have unsurprisingly started coming out of the woodwork. Leading hedge fund managers such as John Paulson and top investment banks like Goldman Sachs have started sounding the alarm bells depending on which candidate wins the presidency. And to be fair, there may be some cause for concern.
Looking at the S&P 500, the US flagship index is currently trading at a lofty price-to-earnings multiple of 29.5. Considering it usually hovers around 15-20, it’s an indicator that valuations are getting a bit rich. And since the stock market is mean-reverting, a downward slide could be on the horizon if business earnings don’t catch up to expectations.
But does that mean a crash is likely to happen in 2024?
Is a crash coming?
Predictions of a stock market crash have been coming for a while now. Going back almost a decade, bearish investors have been making some dire predictions, including notable names such as Micheal Burry. Yet those who listen have missed out on some pretty extraordinary gains. Even after we suffered a severe correction in 2022, the S&P 500’s still up more than 200% before dividends.
But are the permabears finally right this time around? Personally, I’m leaning on the side of no.
There’s no denying valuations are currently elevated. Yet it’s driven by earnings predictions that assume an economic comeback in 2025 as US interest rates fall. Of course, not all businesses are likely to live up to expectations. But the shift towards expansionary monetary policy means that delayed projects are likely to kick off next year.
That can even have positive knock-on effects for the technology companies serving these industries. For example, here in the UK, Kainos Group (LSE:KNOS) has recently seen its usual double-digit growth slow to a crawl.
As a specialist in digitalisation and deploying the Workday software package, the lack of activity within the commercial and public sectors has taken its toll. Delays of large-scale projects have caused 2024 sales to fall below expectations. But management expects most of these headwinds to be resolved before the end of 2025 as interest rates continue to fall.
In fact, despite the slowdown, the firm’s reiterated its medium-term targets while announcing new, more ambitious long-term ones. Obviously, there’s no guarantee of the exact timeline for when delays will be resolved, and it may take longer than 12 months. Nevertheless, with indications of an economic rebound already emerging in the UK, the US is expected to follow now that it has begun cutting rates as well.
Prepare for volatility
Just because the stock market may not be heading for a crash, that doesn’t mean every business is destined for greatness. And when pairing underperformance with a high price tag, downward volatility almost always follows.
Yet, in some instances, holding on through the storm may be a prudent move. So investors must take a closer look at the challenges businesses are currently facing to understand both the risks and potential rewards. In some instances, this may even reveal expensive-looking stocks to actually be a screaming bargain.
Regardless, ensuring a portfolio remains well-balanced and diversified is paramount in keeping risk in check.
This post was originally published on Motley Fool
