Flight of the "red" swan and volatile August: should investors prepare for a collapse?

The main index of the U.S. market, the S&P 500, has been rising with little interruption since April this year. According to CNBC data at the end of last week,  it has already set at least nine records this year, while the Nasdaq Composite has set ten.

Such positivity has already began to alarm investors - they are worried about whether the market is overheated. Oninvest discussed it with managers and analysts;

The S&P 500 was expensive, but now it is becoming overheated, says Askar Akhmedov, investment director at Atlas Capital. He says the first thing to pay attention to is the forecast P/E (price to earnings, the ratio of price to next year's expected earnings) multiple, which as of July 24, 2025 was 22.9. At the same time, the level of "overheating" is spoken about when it is in the range of 22.5-23, Akhmedov says;

There are many arguments in favor of the fact that the U.S. stock market does not adequately reflect the existing long-term risks - the growth of government debt and budget deficit, notes Valery Emelyanov, analyst of investment management company Movcchan's Group. He reminds that buying stocks at historical highs often leads to low returns in the future. "Those who did that in previous decades had returns three to five times lower than other investors, or about the same level as short U.S. Treasury government bonds (about 3% annually)," he said.

Astero Falcon Portfolio Manager Alyona Nikolaeva suggests paying attention to the growth structure of the US market. After all, it is not so much the absolute value and speed of increase that is important, but how this growth is formed. It is mainly provided by techno-giants.

"In fact, 10% of the largest companies are pulling the index up, while the equal weight S&P 500 (equal weighted S&P 500 index, in which all companies have the same weight - ed.) is growing much slower.  You get the classic narrow market, which often precedes corrections," she says.

Alyona Nikolaeva focuses on the reasons why the US market is growing so actively. One of the main drivers of growth in the first half of the year was the expectation of a rapid and aggressive reduction in the Fed rate. But now the market is no longer betting on this scenario. U.S. inflation accelerated to 2.7% in June 2025 on an annualized basis. And the core price index (which excludes volatile food and utility prices) rose to 2.9% over the same period. Meanwhile, the yield on 10-year Treasuries is closer to 5% and is at about 4.4%.

"At such rates, stocks start to compete with bonds," explains Nikolaeva. - Investors are forced to ask themselves whether to keep risky assets or switch to more stable ones. Especially against the background of the fact that the risk premium on shares is now low - less than 3%".

According to her, if the Fed continues to act cautiously in the future and bond yields remain high, investors will reassess the prospects for stocks and how much they are willing to pay for them. "There is a lot of liquidity in the system so far, and this is supporting demand, but you should already be more cautious about the market," she warns.

When we talk about a significant collapse, we are usually talking about a market drop of 20% or more from the peaks - this is almost always associated with recessions, says Askar Akhmedov;

Given that consumption accounts for a significant share of U.S. GDP (over 60%), a recession could lead to rising unemployment. And that can only happen if corporate profits fall. But they are at highs, Akhmedov argues. In the first quarter of 2025, corporate profits in the U.S. was $3.92 trillion. This is the second highest quarterly total since 2023. 

"For the U.S. to go into recession, it takes the coincidence of several shocks at once - fiscal and/or monetary policy contraction, a powerful external shock, or internal imbalances, as was the case, for example, in 2008, when the global financial crisis hit," Akhmedov said. 

Right now, he said, the U.S. economy looks resilient, and debt loads for companies and households in the U.S. are at record lows. Corporate debt as a percentage of market capitalization for the first quarter of 2025 was 19.28%. Household wealth (the net value of all their assets) for the same period was $160.3 trillion .

The stability of the economy is not a guarantee of the absence of market volatility, says Nikolaeva: historically, August and September are considered the most volatile months. This is the time when quarterly company reports are published and macro data are updated.

"The second-quarter reporting season is starting," she said. The Wall Street consensus expects earnings growth for companies in the S&P 500 to slow to 2.8% year-over-year, the lowest level in two years (last year, the S&P 500 ended the second quarter with 3.9% growth). With a projected multiplier P/E above 22.6, that's too modest a result. A fair one would be at around 17, Nikolaeva believes. This is a clear signal of overheating, and any disappointment could trigger a wave of profit taking, she adds.

It should also be taken into account that the number of potential risks is particularly high this year - the threat of new trade duties from August 1, uncertainty about China, the conflict in the Middle East and the war in Ukraine. "Even neutral news in such a context can be perceived as triggers for correction," Nikolaeva concludes.

At the same time, Valery Yemelyanov emphasizes that real collapses are almost never predictable. "Markets fall when a sufficient array of doubts and fears have accumulated. And then something happens that becomes the last straw for stock holders - then they start selling en masse. It could happen tomorrow, or it could happen in a year or later," he said;

Askar Akhmedov believes that the market drawdown, if it happens, will be shallow. Many investors, especially institutional investors, did not expect such a quick and rapid market recovery. "They're sitting with a low percentage of U.S. stocks in their portfolios and wondering, 'What's going to be the next blow to the market?' They're waiting for an opportunity to get back in," he explains his perspective.

According to Alena Nikolaeva, signs of overheating are observed in several directions at once. "Cryptocurrency, namely bitcoin, is also overbought at the moment," she believes. - In mid-July, its price exceeded $120,000. Bitcoin began to be perceived as a protective asset. This is not a real defense, but rather another element of the general euphoria. Such a pure bet on risky assets.

Investor optimism, she said, has spread to Europe as well. However, even here not everything is unambiguous.

"Many have fled from US stocks to Europe as a kind of safe haven from debt problems and the "red swan" (this refers to the policy of US President Donald Trump - ed.). But the situation in the European market is not the brightest either: weak economic growth, social crisis, and bank problems. Yes, valuations on it are lower than in the U.S., but not enough to compensate for the risks". For example, the forecast P/E multiple of the German DAX at the end of 2024 was only 13.99, while the real one in June 2025 was 18.67.

In addition, there remain worrying signals in the US high yield bond market, she adds: "High yield in the US also looks fragile, credit spreads have narrowed and the risk premium is small."

According to her, if a serious correction starts in the U.S., it can quickly spread to other assets: "If there is a serious sell-off in the U.S., it can easily spread to the whole range of global risk assets. And that could be painful.

Askar Akhmedov reminds that the market almost annually goes through corrections in the range of 7-15% and then renews the maximums. Therefore, it is irrational to react to each fluctuation by reorganizing the portfolio.

"The year 2023 was a lesson to those who relied on techanalysis - yield curve inversion and other indicators: recession never happened, even though everyone was betting on it," he recalls. Atlas Capital's risk assessment now focuses on the labor market - "if hiring is okay, economic activity continues.

For hesitant investors, Akhmedov suggests a moderate diversification option: "You can allocate 15% of your portfolio to U.S. stocks, 20% to international stocks, 20% each to corporate and government dollar bonds, and 25% to gold. Such a portfolio on average yields a little less than the stock market, but it is much more stable in times of falls";

Alyona Nikolaeva believes that it is already possible to start increasing the share of protective assets in advance, without waiting for the actual correction. She names gold, platinum and silver as a basic set of protective instruments. Platinum and silver offer protection with an industrial component - they can protect capital as a precious metal in stress scenarios, but at the same time benefit from growing industrial demand if the economy remains strong.

She also recommends taking a closer look at short- and medium-term U.S. government bonds - these, she says, generate income, but are not as sensitive to inflation as long paper, especially in the face of rising government debt;

She pays special attention to currency diversification. "The yen and Swiss franc remain relevant, not because of rates, but because of balance of payments and its historical role as a safe haven." She also calls the Singapore dollar - she says it is "quieter" and more stable, especially if an alternative between the dollar and franc is needed.

In stocks, according to her, securities of companies in the FMCG, utilities and healthcare sectors still have classic protective functions. She cites NextEra Energy, Duke Energy, Procter & Gamble, Colgate-Palmolive, and Coca-Cola as examples. They earn mostly in the U.S., pay stable dividends and provide basic protection in case of increased volatility.

For experienced investors, she also notes options on the S&P 500 and the VIX volatility index, as well as a market neutral strategy that aims to profit regardless of the overall direction of the market.

"For most, still the main protection is gold, cache, treasuries and currency diversification," she said.

Valery Emelyanov believes that the portfolio structure should not be changed under the influence of current news, no matter how alarming they may seem: "Whether your portfolio needs rebalancing depends only on your strategy, not on the level of the S&P 500;

He recommends to make sure that in any situation the conservative basis - bonds or bond funds - remains in the portfolio. For the liquid part, he also recommends investing in absolute return funds, which do not depend directly on index dynamics and give good diversification.

This article was AI-translated and verified by a human editor