We don’t know if a stock market crash is coming next year. The impact of US tariffs back in April showed just how quickly investor sentiment can shift. Even though predicting a crash is almost impossible, it’s easier to spot stocks that could be hit hard if investors suddenly get worried.
Here are two I’m cautious about.
Stretched valuation
First up is Rolls-Royce (LSE:RR). I know many will find this controversial. It’s been the darling of the UK stock market for the past couple of years. In the past year alone, the stock’s up 101%. But hear me out.
The fact of the matter is that during a market crash, overvalued growth stocks tend to get hit the hardest, as investors look for defensive options instead. Rolls-Royce has a price-to-earnings ratio of 57.17, over triple the FTSE 100 average. In my book, that makes it overvalued.
Further, the sharp rally over the past few years means many people are holding stocks with unrealised profits. If the share price starts to fall, people will likely sell their stock to protect their profits. This acts to compound the move lower.
Depending on the exact reason for the market crash, it could coincide with reduced long-haul travel, deferred aircraft orders and pressure on aerospace supply chains. These would all be negative for the share price and are fundamental factors beyond just investor sentiment.
I could be wrong in this view. For example, if the crash is triggered by geopolitical tensions, it could outperform as the defence division sees strong demand. It’s also true that once the dust settles, long-term investors could think about buying the dip created by those who panicked and sold in the short term.
A change in demand
A second stock worth watching, at least, is Persimmon (LSE:PSN). The UK homebuilder has seen the share price rally 9% in the past year, and could keep going in 2026. However, if we do see a catalyst trigger a market downturn, I think it could be one to avoid.
Owning Persimmon stock provides direct exposure to the UK housing cycle. Unfortunately, a market crash typically coincides with falling house prices, in part due to higher unemployment and consumer concerns about making large purchases. If I were considering buying a house, I wouldn’t feel comfortable doing so when people were worried about the state of the economy.
During this scenario, it’s likely we’d see tighter mortgage availability from major banks. The concern is that people might not be able to afford the loans. Again, this could see lower demand for Persimmon.
The risk to my view is that a crash could lead the Bank of England committee to quickly cut interest rates to boost demand. This would make mortgages cheaper, potentially triggering a surge in mortgage demand as people try to lock in the good rates, along with property purchases.
On balance, I think both shares are exposed to a crash (if we get one). Other good growth stocks are less vulnerable, in my view, and could be worth considering now.
