Things have been looking rosy on the stock markets this year, but beware of rose-colored glasses looking to the future.
In July, August and September of 2025, the Nasdaq Composite recorded 27 new highs, followed by the S&P 500 with 24 and Dow Jones Industrial Average with 12.
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Now a growing number of experts warn that these new highs could be followed by new lows — a dire risk to the 62% of Americans who collectively own stocks worth $51 trillion. (1)
An insane amount of money? Some say yes, bubble territory. One measure is the Buffett Indicator, or the stock market capitalization-to-GDP ratio — used to determine whether a market is undervalued or overvalued.
If the total value of stocks on the stock market is more than 115% of GDP, it’s seen as overvalued. According to Fortune, the current market value is more than three times that: 363% of GDP.
So by the Buffett Indicator, it’s extremely overvalued. It’s floating even higher than when the Buffett Indicator reached 212% just before the dot-com bubble burst in the late 1990s.
And just like the highs that preceded that crash, these highs are fueled by speculation in technology. But the scale is much bigger.
MacroStrategy Partnership estimates total investment in AI is 17 times investment in dot-com stocks when that bubble burst. (2)
Another concern is that most of the investment is concentrated in the Magnificent 7 tech giants, with Apple and Meta accounting for more than half of the S&P 500’s gain in 2023 and 2024. (3) In 2025, AI stocks doubled the return of the overall stock market, according to Morningstar.
If year-end earnings come in below expectations, or if capital expenditure on AI infrastructure slows, today’s lofty stock valuations could plummet, bringing the economy and individual Americans along for the ride.
Even if you’re not invested directly in individual stocks but have an ETF that tracks an outperforming index, like the S&P 500 or the Nasdaq Composite, you could be exposed to sector risk if the AI frenzy cools.
Here’s what’s at risk and how to protect yourself.
How a stock-market bubble threatens average Americans
One thing to be wary of is your own spending. According to the “wealth effect” theory, we tend to spend more when we see our assets appreciate in value on paper.
The investment research firm Ned Davis found that each 1% increase in household net worth is associated with a 0.4% year-over-year increase in consumption in the following quarter. (4)
Read more: Want an extra $1,300,000 when you retire? Dave Ramsey says this 7-step plan ‘works every single time’ to kill debt, get rich in America — and that ‘anyone’ can do it
So seeing your stocks soaring might spur you to splurge. Be careful: You don’t want to overspend and then see the value of your investments crash.
Meanwhile, as a growing number of Americans do splash out, the “wealth effect” is hiding weakness in the economy.
The top 10% of earners who make more than $250,000 per year account for more than 49% of all spending, up from 35% in the 1990s. (5)
The majority of Americans are not doing as well, which bodes ill for the economy in general.
Hiring has been stagnant for most of the year, and the government shutdown will impact the economy further. (6)
A stock market crash could be devastating to the jobs market, threatening not just Americans’ investments, but their livelihoods.
How to prepare for a market crash
It may seem counterintuitive, but the first thing to do to prepare for a market correction is to stay invested in some way — be it in the stock market, or bonds or some other security.
That’s better than converting all your investments into cash because the return on cash is zero.
That said, the recent stock runup is a good opportunity to examine your portfolio, revisit your goals and bring your investments into balance.
Reassess your risk appetite based on your age, income and investment time horizon.
Younger investors can usually handle more volatility, so keeping a stock-heavy mix makes sense as a driver of long-term growth.
Couples with small children and not much debt can cushion their portfolio against stock-market swings by moving some of it into bonds or bond funds.
Meanwhile, those with shorter time horizons — like couples with children entering college or those who are nearing retirement — may be better off with more stable investments allocated across stocks, bonds, and cash equivalents like short-term U.S. Treasury bills.
This more stable asset mix may also work for those who are worried about losing their job in a recession and who have fixed expenses.
Diversification is a safety feature, and you can get more diversification by selling single stocks or sector-based ETFs and reinvesting the money in all-market stock ETFs or bond funds.
International stock funds also may be a good way to hedge against a U.S. market correction.
Make sure you have liquid assets in FDIC-insured accounts, too — including an emergency fund that can cover three to six months of essential expenses.
In addition, keep cash equivalents like high-yield savings accounts, money market funds and short-term Treasuries so you are not forced to sell your stocks in a downturn.
Liquidity lets you sleep at night and stay invested when markets get rough.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Gallup (1); Morningstar (2); Statista (3); Nationwide (4); Washington Post (5); Reuters (6)
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.