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Is there likely to be a stock market crash at some point next year? Looking at the valuations of individual FTSE 100 and FTSE 250 stocks makes me think not.
Some are highly priced and might be heading for a fall. But most are valued below their long-term trends, and below the Footsie average.
But then I look over at the US stock market, and I start to think we could be in for some big falls over there. When Wall Street sneezes, London can catch a cold.
S&P 500 records
The S&P 500 has smashed through all-time records this year. At the time of writing, it’s up 27% year-to-date and just a few points short of yet another high.
The tech-laden Nasdaq‘s up 34% in the same time. And it’s just set a new intra-day record above 20,100 points. By the time you read this, both indexes might already be in previously uncharted territory again.
And though most US analysts are bullish, cracks are starting to show. This week the word from US brokerage Stifel is: “The environment does not appear conducive to continued equity mania“.
Avoiding US stocks
If the S&P 500 or Nasdaq hit a correction in 2025, I’d expect UK stocks to fall. Not as far maybe, but world stock markets seem to work that way. One of them drops, then the next one to open has a sell-off, just in case. And so it spreads…
I’ll avoid US stocks, at least until I see how 2025 starts to pan out. So I won’t, for example, be buying Nvidia, up 165% in 2024 and valued at over $3.2trn. And I’ll hold no Tesla stock, currently on a forecast price-to-earnings (P/E) ratio of more than 200.
I probably wouldn’t go very far in trying to avoid UK companies with US exposure.
Safety moat
But I am more likely to seek out stocks that focus mainly on the UK and Europe. That includes some like Lloyds Banking Group (LSE: LLOY), which I already hold.
After the financial crisis, Lloyds withdrew from the riskier international and corporate banking businesses. Instead, it reshaped as a domestic retail bank, and the UK’s biggest mortgage lender.
That brings its own risks, like falling lending margins as the Bank of England slowly reduces base rates. There’s also potential pain from car loan misselling investigations at the moment.
But with Lloyds shares having fallen in the past few months and now on a forward P/E of only 8.5, I think a lot of the risk’s already in the price. If we have a slump, I might top up.
Don’t panic!
My key approach going into 2025 amid signs that we might see a pull-back in the stock market is essentially… don’t panic, and avoid taking unnecessary risks.
The positive thing I’ll do is save as much cash as I can, and let it build in my Stocks and Shares ISA. In the event of a crash, I want to be among the ones hoovering up cheap shares.
