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2025 has been quite a turbulent year for the S&P 500 and US stocks in general. Despite hitting record highs, there are a number of growing concerns that valuations are getting ahead of themselves, especially in sectors like AI. This in itself is not enough to trigger a market crash. Still, as expectations continue expanding, a potential slowdown in growth could trigger another fresh round of volatility.
So, what are the key risks that could lead to a market slowdown?
Catalysts for a crash
Right now, there are three main concerns that even bullish analysts have highlighted:
- Inflation pressure – the latest CPI data for the US economy in June came in higher than expected, even when stripping out volatile energy and food prices.
- Trade uncertainty – the ongoing implementation of US tariffs is disrupting global trade, creating market instability.
- Earnings headwinds – higher costs for consumers could lead to a spending slowdown that might cause companies to fall short of earnings targets.
With uncertainty surrounding all three catalysts, most institutional analysts are warning of further market turbulence in the second half of the year. And with the September-October period having a history of market downturns, a combination of behavioural bias with economic weakness might be the spark that lights the fire.
Panic isn’t a strategy
Overvalued AI stocks would likely be the first to get hit. And it’s why I recently trimmed my position in Arista Networks (NYSE:ANET). Having said that, while there’s valid reason for caution, I don’t think a full-blown stock market crash is on the horizon, but rather a natural ‘correction’. After all, both 2023 and 2024 were exceptional years for the S&P 500.
That’s why, beyond reducing a few of my largest positions, I’ve also been saving up cash to take advantage of any new buying opportunity that may soon emerge.
Looking again at Arista, the networking infrastructure enterprise continues to be a fantastic business in my eyes. The firm is on track to generate close to $3bn of free cash flow this year as data centres continue to upgrade their technology. And even outside of the world of AI, demand for Arista’s Ethernet switches remains staggeringly high.
However, with the shares now trading at a price-to-sales ratio of 18.5, it’s hard to ignore that a large chunk of its recent strong share price run is likely being driven by AI-networking hype. And it’s easy to forget that this sort of spending is ultimately cyclical.
Even without the threat of a potential slowdown, the company is highly reliant on two hyperscaler customers (Meta Platforms and Microsoft) for the bulk of its revenue. And this customer concentration risk could lead to disastrous consequences if either decides to use competitor or in-house alternatives to Arista’s products.
But at the right price, that risk could be worth taking. That’s why I’m planning to snap up more Arista shares in the future, if the stock does take a tumble.
The bottom line
The S&P 500 will eventually crash again. However, when that will be is anyone’s best guess. Personally, I remain optimistic but cautious. And in my opinion, now is a good time for investors to build up a cash position just in case a new wave of buying opportunities does emerge later this year.
