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Over the past few years, the US S&P 500 index has performed very strongly.
Inthe past half-decade, for example, it has moved up by 84%. Compare that to the FTSE 100 on this side of the pond. During that period, it has moved up 42%. I see that as a good performance – but it is only half as good as that of the S&P 500.
But mounting investor concern about prospects for the US and global economy saw the S&P enter a market correction recently. It has recovered some ground but remains 14% below where it stood in February.
Could things get much worse from here?
The market has boomed but that can’t last forever
I think the answer is yes. Despite the fall, the S&P 500 still looks expensive to me. The index’s price-to-earnings (P/E) ratio is 26.
That is well above the sort of P/E ratio I would typically be comfortable with when looking for shares to buy for my portfolio.
We know from history that stock markets are cyclical. They go up, come back down and start the process again.
Given its valuation, the cyclical nature of markets and the high level of uncertainty about global trade and US economic prospects, I reckon the S&P 500 could be heading for a substantial crash.
But what I do not know (and nobody does) is when.
It could be next week, it might be next year or it could be a decade from now. As the past few weeks have shown us, markets can move in dramatic and often unexpected ways.
Here’s how I’m preparing
What does that mean in practical terms for my approach as an investor?
For one thing, I have no plans to invest in an S&P 500 index tracking fund any time soon.
Secondly, I will continue to look for potential bargains in the form of individual shares I think are priced below their long-term value.
For example, I have had my eye on Nvidia (NASDAQ: NVDA) for a while. Given its spectacular performance over the past few years, that may be no surprise.
I like the fact that Nvidia operates in a massive, big-budget market that still has substantial growth opportunities.
I also strongly like its competitive position. It has a lot of proprietary technology, a large installed user base and chip manufacturing expertise that is both very rare and exceptionally difficult to recreate from scratch.
But the share price’s gallop upwards in recent years has made it too costly for my tastes. Lately Nvidia stock has had a rough time and for understandable reasons. Fast-changing tariff and chip export rules threaten to take a big bite out of Nvidia’s sales and profits.
For that reason, I am still not ready to buy. But if an S&P 500 crash drags the price down enough, Nvidia is on my shopping list.
