In recent years, the S&P500 did something that investors like. It has climbed higher and this year the bull market continues to extend. Indeed, since the start of 2023, the major index has achieved a gain of 100%. Indeed, investors have jumped at the chance to get involved in the latest technological development: artificial intelligence (AI). They bought AI shares from chip designers Nvidia to memory creators like Micron technology and cloud service providers such as Microsoft.
These companies and their peers have generated strong revenue growth from their AI products and services, which has attracted investors to these exciting stories. All of this has pushed the S&P 500 higher, as AI stocks have a strong presence in the benchmark index. And given that AI is still in its early stages of practical use, additional growth could occur.
It paints a bright picture, but some investors have started to worry about the future of stocks – and the words “stock market crash” have even appeared. But here’s some good news: If a stock market crash occurs, history suggests there are two crucial steps to take.
Image source: Getty Images.
Will AI Stocks Weigh on the S&P 500?
First, let’s consider the potential hot spots that investors are noticing in the current market environment. And it starts with the field of AI. Although AI stocks have pushed the index higher in recent years, investors fear they could end up weighing on the index at some point. Tech giants are investing heavily in AI infrastructure, and if they spend too much, their profits and stock prices could suffer. Investors have been mulling over this risk, causing some to hesitate before buying AI stock or even selling their positions.
At the same time, even though the Federal Reserve left interest rates unchanged at its last meeting, rising inflation remains a concern and the market is pricing in another hike. In fact, the chance of an increase at the December meeting is 83%, according to CME Group’s FedWatch tool. A higher interest rate environment is generally not favorable for businesses because it increases their borrowing costs or the stock market – higher interest rates may cause some investors to favor bonds over stocks.
Finally, stock prices have soared, with overall valuations at near record levels. The S&P 500 Shiller CAPE ratio, a snapshot of stock price and earnings per share, illustrates this point.
Shiller CAPE ratio data by YCharts
It’s never too early to plan for a stock market crash
In this context, some investors fear that a decline – or even a stock market crash – could be the next consequence. It is important to note that even if you are extremely optimistic and do not believe a crash is imminent, it is never too early to plan for a crash. These events occur periodically as part of a normal market cycle, so it’s best to be prepared for them.
With this in mind, what should you do now? The good news is that there are two steps you can take to help your portfolio grow and limit the impact of stock 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 them for several years, five at least. When you do this, slowdowns or crashes may not even be noticeable in your long-term performance. History shows us that the S&P 500 has always bounced back after tough times. Therefore, if you invest in strong companies, you will likely see the same trend.
^SPX data by YCharts
The second thing you can do right now, and especially in a crash, is buy stocks. Not just any stocks, but quality players at reasonable or even very cheap prices. In a stock market downturn or crash, you’ll find plenty of them, and while many investors may not be in the mood to buy, it’s actually the best time to buy stocks. Even if they drop again after your purchase, it doesn’t matter. If you’re willing to stick it out for several years, you could score a big win.
So, if an accident happens – sooner or later – you can approach this moment with a cool head. By investing when valuations are down and focusing on the long term, you’ll have a good chance of weathering any of these tough times.
Gn bussni
