Will The Stock Market Crash In 2025? Watch These 3 Key Indicators Carefully

The Standard & Poor’s 500 — probably the most popular measure of the stock market’s performance — is sitting right near all-time highs. The S&P 500 index is also perched at one of the highest valuations of all time, indicating that investors are paying a high price for potential future earnings. These lofty expectations may have some investors nervous, particularly as a variety of other risks — the effects of tariffs, soon-to-rise inflation and uncertain monetary policy — threaten stocks’ stability. 

So following a strong run-up in 2025 — and robust runs of greater than 20 percent gains in both 2023 and 2024 — are stocks poised for a crash in 2025? Here are three things to watch. 

Is the stock market overvalued, and will it fall in 2025?

On objective measures such as a price-to-earnings (P/E) valuation, the S&P 500 appears overvalued historically. But that’s not the whole story here, especially given highly profitable big tech names such as Microsoft, Nvidia and Apple have come to dominate the performance of the index.

The index’s forward P/E ratio — the price being paid for next year’s expected earnings — is now around 22.5, according to a Bank of America analysis. With the exception of a very brief period in August 2020, that’s the highest valuation since the dot-com peak of 1999-2000. At the height of that era’s euphoria, the forward P/E ratio touched 25 times earnings. But 2025’s crop of S&P stocks differ from the mix of yesteryear, which was less concentrated in high-quality businesses.

“Unlike many of the previous nosebleed valuations that led to eventual economic slowdowns, the S&P 500 remains highly cash flow heavy relative to previous periods,” says Edison Byzyka, chief investment officer, Credent Wealth Management. 

Today’s tech titans earn tremendously attractive margins and they’re involved in one of the most highly anticipated trends of recent times: artificial intelligence (AI). The big tech names, bolstered by strong profit growth, keep growing their share of the total index, meaning the S&P’s performance relies more and more on how they perform and less on smaller companies.

“Looking at the S&P 500 index, it continues to get more and more concentrated in just a few names,” says Brian Spinelli, co-CIO, Halbert Hargrove. “I don’t know if markets are considering what happens if those handful of names run into earnings challenges or can’t keep growing earnings to keep up with their current valuations.”

A nosebleed valuation creates a further risk for investors, though stocks may well continue to trade at high valuations for some time. As the well-worn saw goes: “The market can remain irrational longer than you can remain solvent.” But is the market poised for a fall in 2025?

“While valuations are high relative to long-run averages, I don’t think that is a great timing tool for predicting the next drawdown in U.S. equities,” says Spinelli. Instead, he says investors should be considering what today’s high valuations mean for stocks’ future performance.   

“Investors should be bringing down their long-term return expectations on U.S. equities and not expecting double-digit annualized returns based on the previous five years,” he says.

3 signals to watch for a market downturn

While stocks might not be poised for an imminent fall, investors should keep an eye on a few signals to see if the market may turn. There are a number of significant risks on the horizon, and some analysts think that investors may be overlooking the potential downsides of some risks.

1. Rising 10-year Treasury yields

Investors are always on the hunt for strong risk-adjusted returns. If investors can earn the same return in a safer investment such as a bond, then they’ll tend to sell riskier investments such as stocks. So lower interest rates help boost stocks, while higher rates help deflate stocks. 

Analysts often compare returns on a key benchmark such as the 10-year Treasury to the stock market’s earnings yield — the inverse P/E ratio — to gauge how expensive stocks look. Now, the 10-year Treasury yields 4.21 percent, about its floor over the last year. Compare it to the forward S&P 500 earnings yield of 4.44 percent (the inverse of 22.5 times earnings). So, investors are receiving only a small premium over the safer return on bonds for stocks’ higher risk. 

On top of this, the market is in a strange moment, as the Federal Reserve faces the likely prospect of having to navigate stagflation caused by President Donald Trump’s tariffs. As the labor market is weakening, inflation is rising. This tension puts the Fed in a tough spot, since its remedy for unemployment — low interest rates — puts upward pressure on inflation and long-term rates. 

At the same time, lower short-term rates may help boost long-term yields such as the 10-year Treasury yield. That’s what happened in the autumn of 2024, as the Fed lowered interest rates by a total of 1 full percentage point — the yields on 10-year Treasurys zoomed higher.

Now we have other reasons to believe that longer-term yields may rise. The U.S. government has not only made permanent the 2017 Trump tax cuts, it’s also locked in an estimated incremental $3.4 trillion in extra deficit spending as part of 2025’s One Big Beautiful Act. All of that will require more debt issuance to fund, putting upward pressure on rates.

Beyond that, Trump continues to attack the Fed’s independence, publicly calling for the resignation of Fed Chair Jerome Powell. The end of Fed independence could augur a period of rising inflation, as interest rates are set by what is politically expedient for the president. 

So if investors start demanding higher long-term yields in exchange for these risks, they may decide that forward returns on stocks need to go up as well — in other words, that stocks must fall in light of better returns on bonds. 

2. Watch AI spending amid rising tariffs

Spending on AI has become a huge driver of the U.S. economy even as other sectors are showing slowing growth. In the second quarter, AI spending was an estimated 1.3 percentage points of the 3.3 percentage growth (that is, 40 percent) in U.S. second-quarter GDP, according to economist Paul Kedrosky. That’s largely before Americans are feeling the inflation from tariffs. 

So, a slowdown in AI spending could lead to a significant decline in actual economic growth. As important for the stock market, it could herald a significant turn in the AI narrative that’s been powering stock valuations higher for the last few years. Given the high concentration of the S&P 500 in AI-related stocks, such a change could have huge effects.

“Investors should keep an eye on earnings and watch if these AI investments are producing a return on the large capital expenditure,” says Spinelli. “With all the money being invested in AI, will the revenues follow, and will investors be patient?”

Some reports have shown that companies have not been seeing the returns they expected in their AI investments. For example, a recent analysis from MIT suggests that despite $30 billion to $40 billion in investment in generative AI, 95 percent of companies are seeing no return. If this kind of story bears out on a wider scale, it could shift expectations — and the AI narrative. 

Plus, even if AI spending does continue past its already breakneck pace, it may not offset challenges to falling consumer spending due to tariffs, resulting in a slowing economy. 

“Investors don’t seem to care much about the tariff story,” says Brian Andrew, chief investment officer, Merit Financial Advisors. “We think that is a mistake.” 

Pointing to rising tariffs that he expects to really hit consumers in the third and fourth quarters, he says, ”While the Fed is saying that this increase is one-time, it still means prices are higher and reduces the amount of disposable income people have for consumption.”

3. Keep an eye on unemployment

“Labor market strength is by far the most important indicator through year-end,” says Byzyka.

A slowing economy will show up in the unemployment figures relatively quickly. Investors recently saw a surprising negative shock in the July unemployment report when the economy gained just 73,000 jobs that month against an estimated gain of 115,000. The Department of Labor also revised down its May and June jobs gains by a total of 258,000. 

“Watch the level of jobs being created each month to discern whether or not they’ll have to be easier on policy and lower rates faster,” says Andrew. “We were creating over 250,000 jobs just two years ago and are nearing 100,000 for a three-month average. This is suggesting that the economy is slowing, despite the backward-looking earnings picture.”

Bottom line

Should investors sell it all while the market still looks strong? Not at all, say the experts. It’s important to take a long-term perspective on investing and think about dips in the market as potential opportunities to increase your investment, setting yourself up for the next run in later years.

“There are always risks in equity markets,” says Spinelli. “Rather than try to time them, diversify, and make sure you have a long enough time horizon to be able to ride out the volatility.”

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.