The stock market’s at record highs and, on the surface, everything looks rosy. But beneath the headline numbers, a growing number of institutional analysts are sounding the alarm.
And with AI-related valuations looking increasingly stretched, now might be a smart time to start preparing for the worst. Here’s how…
Is a crash coming?
The concern centres on concentration risk. The S&P 500‘s recent rally has been driven almost entirely by a handful of mega-cap technology companies. And with the Shiller CAPE ratio sitting well above 40 (the highest since the dotcom crash), the market’s seemingly pricing perfection.
Capital Economics has warned that if AI fails to deliver a return on investment at the pace investors currently expect, the index could correct by as much as 30% from peak to trough!
However, it’s important not to panic.
The same analysts note that corporate earnings remain robust, economic growth looks healthy, and AI enthusiasm may continue to push equities higher before any reversal arrives. In other words, these record highs could be entirely justified if earnings catch up.
Nevertheless, regardless of whether a correction materialises, having a plan is simply good investing practice.
That means keeping an emergency fund topped up, hold a cash buffer to protect against volatility, capitalise on any potential buying opportunities, and ensure your holdings are diversified enough to stay within your personal risk tolerance.
And for those who’ve already ticked off those boxes, there are still plenty of opportunities to explore, even in today’s frothy market.
One contrarian idea to consider
Indeed, there are pockets of genuine value well away from the AI frenzy. Trex Company (NYSE:TREX) is one I’m taking a closer look at.
As a quick introduction, Trex designs and manufactures composite decking and railing products. It has no meaningful connection to AI infrastructure spending, potentially making it a natural diversifier in any portfolio concentrated in tech.
Looking at its first quarter results, the business firmly beat expectations. While revenues only climbed 1%, that was notably better than what many analysts were projecting. And it’s a similar story for the group’s adjusted earnings per share, which shot up 16.1% ahead of consensus.
Subsequently, the stock’s up over 27% since the start of the year – outpacing the S&P 500 by a wide margin. And yet with a price-to-earnings ratio of 25, Trex shares remain relatively cheap compared to the wider market.
So what’s the catch? The main investment risk is macroeconomic sensitivity.
Trex’s business is tied closely to home renovation spending and consumer confidence. The residential repair and remodelling (R&R) cycle has a significant influence on Trex’s volumes. And given that installing its decking is far from cheap, today’s elevated interest rates aren’t exactly sparking a gold rush.
If interest rates stay elevated for longer, or potentially even start climbing again (as we’ve just seen in Europe), demand for new decking could soften faster than current guidance implies.
The bottom line
Nobody can reliably predict when the stock market will correct. But smart investors don’t need to. They simply stay invested, keep dry powder ready, and look for good businesses that other investors are overlooking.
Trex could be a solid example of the latter. And it’s why I think investors may want to start researching further.
Should you invest £5,000 in Trex right now?
When investing expert Mark Rogers and his team have a stock tip, it can pay to listen. After all, the flagship Twelfth Magpie Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.
And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Trex made the list?
Zaven Boyrazian does not hold any positions in the companies mentioned.
