It’s beginning to look like there are limits to stock market valuations. And this is especially true for stocks of companies associated with the rise of artificial intelligence (AI).
As a result, stock prices are likely to fall this year. However, I don’t think investors who follow a few basic principles need to worry too much.
evaluation
There’s no question that stock prices reflect some optimistic assumptions, especially in the US. You can see this by looking at the Shiller P/E (adjusted for cyclicality). S&P500.
Source: Multipl.com
There are two major reasons for this. One is optimism about corporate profitability, driven largely by AI, and the other is the expectation that lower interest rates will justify higher price multiples.
As a result, stock prices are unstable. If things don’t go as investors expect – if AI doesn’t boost profits or interest rates don’t fall – stocks could plummet.
The problem is that there are no guarantees, which creates a dilemma. Investors can stay out of the stock market and risk missing out on rising prices, or they can stay invested and face the possibility of a crash.
Kobayashi Maru
Some readers may understand that Star Trek FYI — The Kobayashi Maru is a no-win scenario test for Starfleet Academy cadets. Well, it looks like investors are in a no-win scenario as well. However, there are some things you can do to avoid the dilemma altogether. One is to focus on buying stocks in blue-chip companies.
A strong business is a valuable asset. Also, while stock prices may not indicate this during a recession, stock markets tend to reflect this over time.
This point reveals another thing investors can do to survive stock market crashes. Taking a long-term perspective can negate the significance of sudden drops in stock prices.
If investors don’t need to sell their shares, it doesn’t matter how much the market offers. What matters is what they look like in 10, 20 years, and that depends on the underlying business.
example
Dr. Martens (LSE:DOCS) is a good example. I own the stock in the portfolio, but my investment thesis has nothing to do with what his stock price will be in 2024.
The company has struggled recently due to a combination of operational errors and a difficult macroeconomic environment. The former is under its control, the latter is not.
In China in particular, there is a risk that personal consumption will remain sluggish for some time. However, things are starting to improve elsewhere and I think the business may have already passed the worst.
At the end of the day, I don’t think the 8.5x price-to-earnings ratio accurately reflects the company’s long-term prospects. And that’s why I’m buying stocks.
What will happen to the stock price?
Stock markets are currently pricing in optimistic assumptions about AI and interest rates. But while that creates room for a potential recession, it doesn’t guarantee that stock prices will collapse.
In my own portfolio, I adhere to the principles of long-term investing. If you do that right, the rest will follow. I don’t have any intention of selling this year, so I don’t have to worry about a possible crash.
The post Will the stock market crash in 2024? Originally published on The Motley Fool UK.
Read more
Stephen Wright works at Dr. Martens Plc. The Motley Fool UK has no position in any stocks mentioned. The views expressed on the companies mentioned in this article are those of the writer and may differ from official recommendations we make on subscription services such as Share Advisor, Hidden Winners, or Pro. At The Motley Fool, we believe that considering diverse insights makes us better investors.
The Motley Fool UK 2024
