S&P 500 tech stocks have taken quite a beating over the last few days, and concerns surrounding artificial intelligence (AI) disruption and lofty valuations sent prices falling. But could this just be the beginning of a wider US stock market crash? And if so, how far do the experts believe the market could tumble?
Volatility on the rise
While sudden aggressive drops in stock prices are usually caused by a clear, distinct catalyst, that’s not what’s happened this time around. Instead, the recent downward pressure on the US tech sector seems to be originating from a variety of converging factors.
Weaker-than-expected earnings, combined with further AI capex by Microsoft, triggered an initial wave of selling. This was followed by the launch of next generation AI assistant Claude Cowork by Anthropic that investors believe threatens existing enterprise software solutions.
Combining all this with further early earnings misses and a weaker outlook from key S&P 500 players alongside premium valuations, it isn’t so surprising that volatility has started spiking.
Yet, if some institutional forecasts prove to be accurate, this might be just the beginning. US unemployment’s steadily ticking up, inflation’s proving sticky, and consumer credit quality’s in decline.
While none of this guarantees a recession, the analyst team at BCA Research has estimated the probability at a concerning 60%. And as for the S&P 500, BCA has projected that America’s flagship index could tumble to between 4,200 and 4,500. Compared to where the index stands today, that suggests up to a 40% crash could be on the horizon!
Keep calm and carry on
While concerning, it’s important to highlight that BCA currently has one of the most bearish outlooks for the US market. By comparison, the experts at Goldman Sachs have projected only a 25% chance of a recession paired with a 15% pullback should things turn to custard.
Regardless, the best strategy for navigating volatility remains the same: focus on the business, not the stock price. And if the business continues to thrive while the share price dives, it may be time to consider going shopping.
With that in mind, I’m keeping a close eye on Toast (NYSE:TOST).
An emerging buying opportunity?
The one-stop-shop restaurant tech platform is now trading at a 52-week low, stumbling by over 16% since the start of the year. That isn’t entirely surprising given the stock still trades at a fairly expensive forward price-to-earnings ratio of 22. Yet, looking at the underlying business, the company seems to be thriving.
More than 156,000 restaurants now rely on its platform worldwide, driving impressive annual subscription revenue, alongside continuous cash flows from small fees on all transactions moving through its network.
Obviously, a weaker US economic outlook doesn’t bode well for this business. After all, if consumers stop eating out, that means fewer restaurant transactions, resulting in a potentially painful slowdown. And given the high failure rate of restaurants in general, a wider recession will undoubtedly have a nasty impact on its subscription income as well.
Yet, with the stock selling off on what is ultimately a cyclical headwind, it’s hard not to be tempted by this high-growth enterprise. That’s why I think investors should consider taking a closer look. And it’s not the only potential S&P 500 opportunity I’ve got on my radar right now.
