Can the US stock market see a deep correction amid stretched valuations and geopolitical risks?(Photo: Getty Images via AFP)The resilience of the US stock market has sparked a debate among investors: Is the market now overheated and due for a deep correction?
The S&P 500 has gained about 9% so far in April, trading near its all-time high. Tech-heavy Nasdaq extended gains for a 13th straight session last Friday, which, as per Reuters, was the first time since 1992. On Monday, the Nasdaq slipped 0.26%, while the S&P 500 fell by 0.24%.
At a time when markets have no dearth of headwinds, the resilience of the US stock markets has fanned speculations that they could be vulnerable to a correction.
"Ongoing concerns around global growth and inflation caused by persistent global uncertainties, along with stretched valuations, do suggest that the US stock market could be vulnerable to a correction, but that does not mean to say it is inevitable," said Ross Maxwell, Global Strategy Operations Lead at VT Markets.
Maxwell added that while current conditions could threaten a potential correction, they also reflect a market that has so far demonstrated an ability to adapt.
Maxwell highlighted that moderating economic growth, along with increased inflationary pressures, can potentially keep monetary policy tighter for a longer period, which can weigh on risk appetite.
Moreover, geopolitical tensions, supply chain adjustments, and uneven global demand create further unpredictability that markets dislike and can create sharp volatility spikes when repricing.
Stretched valuations, especially in the tech segment, have emerged as fresh concerns for markets.
Subho Moulik, Founder and CEO of Appreciate, highlighted that stretched valuations are a legitimate observation.
"At 20.9 times forward earnings, the S&P 500 trades above its 10-year average of 18.9 times. But valuations are elevated because earnings are growing, not because markets are speculative," Moulik said.
Moulik underscored that full-year 2026 EPS growth is projected at 18%. Since 1950, the average S&P 500 bull market has lasted 5.5 years, delivering 191.6% in gains. This one is just 3.5 years old.
"Since 1926, the S&P 500 has been higher one year after a new all-time high approximately 80% of the time. That figure holds at 79% even when the high followed a drawdown of 10% or more. Record highs are not a warning signal. They are the natural state of a functioning bull market," said Moulik.
Despite geopolitical uncertainties and concerns over valuations, strong corporate balance sheets and healthy consumer spending are expected to underpin the US market.
"Valuations in several sectors, particularly technology, appear to be high, leaving little margin for disappointment in earnings or guidance. However, it is equally important to recognise the remarkable resilience of US markets, with strong corporate balance sheets, consumer spending, and continued innovation-led gains," Maxwell noted.
"This resilience has repeatedly absorbed shocks that might otherwise have triggered deeper pullbacks. As we have seen with the SP500 and Nasdaq both recording record highs, despite high energy prices and the ongoing conflict with Iran," said Maxwell.
While the US market has risks, such as sticky inflation, a prolonged pause on interest rate cuts, and exuberance in the tech segment, that cannot be easily overlooked, a 5-10% pullback at any point would be normal and would not break the structural growth story, according to experts.
According to Moulik, for Indian investors whose US allocation has now drifted to 22-25% of their portfolio on the back of strong equity and currency gains, the question to ask is not whether to hold US equities. It is whether that holding is deliberate.
"A 20-30% allocation remains structurally sound for diversification and global sector access. The approach now needs to shift from expansion to precision, i.e. rebalance to intent, not to momentum," said Moulik.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
Nishant is a market reporter at Mint, where he holds the official designation of Principal Correspondent – Markets. He has been closely tracking the Indian stock market as well as major global stock markets along with the broader macroeconomic trends for a decade.
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Apart from economics and investing, he has interests in geopolitics and emerging technologies, such as AI.