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2025 has been a year of record highs for the UK and US stock markets. But while British shares continue to look undervalued, the same can’t be said for American equities. In fact, despite numerous economic threats and uncertainties looming on the horizon, the S&P 500 has continued to climb higher.
The market’s resilience is certainly welcome, but it could also be an early warning sign of complacency. And as a result, numerous investing experts have started warning of the possibility of catastrophe later this year.
Caution advised
Perhaps one of the most vocal voices of caution is coming from the CEO of JP Morgan Chase, Jamie Dimon. With new US tariffs soon to be reinstated with huge trading partners like Europe and China (unless a trade deal suddenly emerges), he’s warned of incoming inflation. Depending on its severity, consumer spending could soften significantly, resulting in slower economic growth. And in the worst-case scenario, that could lead to stagflation.
Dimon isn’t the only one getting nervous. Other high-profile investors such as Michael Burry and Albert Edwards are also becoming sceptical that the US stock market can sustain its current valuations, with a correction, or potentially even a full-blown crash, due to arrive later this year.
Valid concerns
These experts have raised some legitimate concerns over the current state of the economy. And the US stock market does look vulnerable in certain sectors, particularly in artificial intelligence (AI), where sky-high valuations are completely divorced from fundamentals. For example, Palantir Technologies (NASDAQ:PLTR) is one US stock that I’m steering clear of.
The business actually looks quite promising. As a specialist in data analytics and AI that even the US government uses in counter-terrorism, Palantir has proven to be a force to be reckoned with. That’s translated into phenomenal revenue growth rates averaging 27% a year since 2020. And if management’s forecast is correct, the company’s on track to deliver up to $1.8bn in free cash flow by the end of 2025.
Needless to say, those are some impressive feats. And when combined with the hype surrounding the AI industry, the US stock’s up a jaw-dropping 395% in the last 12 months alone!
However, this excitement has pushed the price-to-sales ratio all the way to 113. For reference, the average for US stocks is 3.2. In other words, all it takes is one missed earnings target for volatility to wreak havoc on the Palantir share price. And considering the business is highly dependent on US government contracts, the slightest cut in the defence budget could be all it takes to push things over the edge.
Management’s fully aware of this risk and has been actively diversifying into commercial markets to reduce its dependency. But whether this process can be completed fast enough is anyone’s best guess at this stage.
Keep calm, carry on
Is the stock market guaranteed to crash in 2025? No. While investors like Dimon are right to highlight market vulnerabilities, timing market crashes remains exceptionally difficult. And it wouldn’t be the first time experts have called for disaster, only for stocks to keep rising.
The key takeaway isn’t to ignore these warnings but to use them as a starting point for further research to identify potential weaknesses in a portfolio and make sure investors are staying within their risk tolerances.
