The warning signs of a looming stock market shakeup are growing. With a major alert flashing last Friday, here’s what you need to know to stay ahead of the next big crash.
Here’s When the Stock Market Could Drop 20% in 2025
Some experts anticipate that the S&P 500 and Nasdaq could face significant sell-offs as early as the first quarter of 2025.
Others argue that strong fundamentals among key companies might provide resilience, but markets remain vulnerable to sudden shifts in interest rates or unforeseen geopolitical developments.
Although there is currently no evidence pointing to a catastrophic crash, the rise in the VIX (Cboe’s volatility index, which measures implied volatility in U.S. markets) signals heightened risk of abrupt market swings.
Several factors could trigger a sharp and violent downturn, shaking investor confidence. Below, we explore the warning signs that could foreshadow a 20% market drop and assess the conditions that might set off such a dramatic correction.
When Will the Stock Market Crash 20% in 2025?
Accurately predicting a 20% market crash is both difficult and risky, but emerging technical and fundamental indicators suggest that corrective scenarios could be imminent.
A notable signal comes from the Technology Select Sector SPDR (XLK), an ETF tracking the tech sector and key stocks like Nvidia, Apple, and Microsoft. Recently, the XLK broke its 50-day EMA, a sign that upward momentum may be fading. Support levels indicate the ETF could drop another 5-7%, potentially testing critical areas around $221, where the 200-day moving average resides.
Similarly, the Nasdaq Index has fallen below its 50-day EMA. However, a deeper correction would require the index to breach the July peak of 20,650 points. If this level is broken, the index could slide to a support range of 19,650 to 19,800 points, approximately 7% below current levels.
The outlook is further complicated by recent macroeconomic developments. A stronger-than-expected nonfarm payrolls report pushed U.S. Treasury yields higher, intensifying selling pressure on major stock indices. This dynamic highlights a shift in investor preference toward government bonds, viewed as safer alternatives to equities after the extraordinary stock market performance in 2023 and 2024.
In the coming weeks, the behavior of institutional investors will be critical. A significant reduction in equity exposure, coupled with expectations of elevated interest rates through mid-2025, points to a plausible short-term correction. However, such a decline could also present opportunities for investors to buy on weakness.
Why the Stock Market Could Drop 20%
While technical indicators can help identify when a crash might occur, understanding the structural and macroeconomic factors behind market vulnerability is equally crucial. Here are the key risks creating fertile ground for a 20% correction:
- High Stock Market Valuations: The S&P 500 is trading at approximately 27x trailing earnings, far above the long-term average of 20x. Even with projected double-digit earnings growth over the next few years, valuations would remain elevated at around 22x, suggesting limited room for upside.
- Prolonged High Interest Rates: Recent labor market data indicates that the Federal Reserve may keep rates higher for longer. While rate cuts are a possibility, odds are currently split at 50%, leaving monetary stimulus uncertain. Elevated interest rates make equities less attractive compared to fixed-income investments, which now offer yields exceeding 5% in some cases.
- Pressure on the Dollar: The U.S. dollar is significantly overvalued relative to other currencies, creating capital outflows from emerging markets to the U.S. Global economic uncertainty and U.S. monetary policy could exacerbate market volatility.
- End of the Bull Cycle: Historically, markets perform best at the tail end of a bull cycle, but rising risk indicators suggest that momentum is waning.
- Geopolitical and Macroeconomic Risks: The ongoing war in Ukraine, global trade tensions, and shifts in economic policies add layers of uncertainty. Demand for safe-haven assets like gold is rising, driven by geopolitical risks and inflation concerns
- Overexposure to Technology Stocks: The widespread focus on artificial intelligence as a growth driver has led to heavy concentration in large-cap U.S. tech stocks. Excessive sector concentration often precedes corrections, as funds eventually rotate capital into less overvalued areas, such as cyclicals (e.g., industrials and financials) or mid-cap stocks. A rotation away from tech could cause the Nasdaq to tumble, with the S&P 500 following suit.
DISCLAIMER
The information in this article is for informational purposes only and should not be used as the sole or primary basis for investment decisions. Investors are fully responsible for their choices, as only they can assess their risk tolerance and time horizon. This content does not constitute an offer or solicitation of public savings.
Original article published on Money.it Italy 2025-01-14 07:47:00. Original title: Ecco quando il mercato azionario crollerà del 20% nel 2025
