Should I prepare for a stock market crash in 2025?

Many investors fear a market crash, but the omens look pretty good for 2025. Dr James Fox explains his positioning for the new year.

| More on:
Young Caucasian man making doubtful face at camera

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As I write, a stock market crash feels quite unlikely. British and American inflation data for December was better than expected, providing embattled chancellor Rachel Reeves with a little bit of breathing space.

Why’s that important? Well, I’d suggest that a stock market crash, in the UK at least, needs a real catalyst. That could be rising inflation, a surge in oil prices, or even a new regional conflict.

However, there’s one thing that’s unlikely to cause UK stocks to rout, and that’s a lack of confidence in the valuation of British stocks. UK-listed firms already trade with significant discounts to their American peers.

So should I prepare for a stock market crash? Well, on evidence, I’d say ‘no’.

The omens are good

While past performance doesn’t guarantee future returns, there’s a well-defined relationship between FTSE 100 shares and interest rate cycles. Historically, UK stocks have risen in the 12 months following the initiation of rate cuts, and this is particularly relevant as the Bank of England’s currently six months into a rate-cutting cycle.

In fact, UK stocks have typically posted above-average returns in rate-cutting cycles, notably when recessions are avoided. During the 1990-1991 recession, the FTSE 100 climbed over 22% in the year following the first rate reduction. Moreover, returns averaged an impressive 31.5% during the 1996-1997 and 1998-1999 rate-cutting cycles.

Perhaps unsurprisingly, this trend isn’t limited to the UK market. Across major economies, stocks have typically shown strong performance during periods of monetary easing. However, the current scenario presents unique challenges, including increased dependence on China’s growth and persistent equity outflows from the UK market.

Despite these factors, many analysts remain optimistic about the potential for FTSE 100 shares to deliver positive returns in the coming year. That’s particularly so in sectors such as banking, technology and consumer discretionary. As such, I don’t think there’s much need to prepare for a stock market crash by holding back on investments.

One to consider

In a falling interest rate environment, housebuilders are an obvious area of interest. Vistry Group (LSE:VTY) has been catching the attention of analysts in recent months, with some suggesting that it may have been oversold.

Notably, I was one of the investors who sold their Vistry shares last year after the company issued multiple profit warnings and said they had underestimated costs. I actually reached out to Vistry’s investor relations team to ask whether they had misled the market on costs. They haven’t responded to either of my emails.

However, we’re now looking at a stock that trades at 11.6 times forward earnings, 8.2 times projected earnings for 2025, and 6.2 times expected earnings for 2026. This actually puts it at a discount to the likes of Persimmon, which is arguably less diversified than Vistry.

Vistry has an affordable housing division that reduces some of its exposure to volatility of the private market. Personally, I’m not investing in it — my trust’s been eroded. But I appreciate that some analysts will see this slump as an opportunity.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the companies mentioned. The Motley Fool UK has recommended Vistry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

2 UK shares that could soar if interest rates sprint lower!

The Bank of England's latest meeting has fed speculation of swingeing interest rate cuts. I think these UK shares could…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

My favourite FTSE dividend stock just jumped 17%! So why am I sad?

This investor has mixed feelings today as a quality dividend stock from the FTSE 250 surged higher in his portfolio.…

Read more »

Investing Articles

Here’s why AstraZeneca stock jumped nearly 6% in the FTSE 100 today

FTSE 100 heavyweight AstraZeneca helped propel the blue-chip index to a record high today. Here's what investors were cheering.

Read more »

Closeup of "interest rates" text in a newspaper
Investing Articles

Interest rates fall again! Here are 3 FTSE dividend growth shares to consider buying

As interest on cash savings becomes increasingly less attractive, Paul Summers has been looking at dividend growth shares for passive…

Read more »

Investing Articles

Up 10% today, I think this FTSE 250 growth share could continue to surge!

Babcock International's flying after upgrading its full-year forecasts. I think the FTSE 250 defence share might just be getting started.

Read more »

Investing Articles

The AstraZeneca share price jumps 5% on today’s strong results – but is it too expensive?

Harvey Jones hails the brilliant long-term performance of the AstraZeneca share price, but wonders whether the FTSE 100's biggest company…

Read more »

Investing Articles

Is this my chance to buy Alphabet shares?

A big step up in AI spending at Google has investors nervous, but has it created an opportunity to buy…

Read more »

Senior woman potting plant in garden at home
Investing Articles

£10k in savings? Here’s how an investor could aim for a monthly second income of £1,200

Mark David Hartley considers how investors could build towards an early retirement plan with a second income from a portfolio…

Read more »