Key Points
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Stocks have soared in recent years amid excitement about the artificial intelligence growth story.
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Market downturns and crashes are part of the market cycle — and they don’t have to get in the way of your investing success.
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A market crash may be very far from your mind right now — or very close, depending on how you view recent market performance. The three major benchmarks, the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average, have soared in the double-digits over the past few years in this bull market. And just this week, the Dow Jones closed above 53,000 for the first time ever.
What’s driven this momentum? Artificial intelligence (AI) stocks have set the pace over the past few years, as investors have jumped to get in on the next game-changing thing in technology. AI has the potential to streamline companies’ operations and help them innovate — and all of this could supercharge earnings over the long run. Investors, wanting to be part of this from the get-go, have been buying shares of companies that play key roles in this revolution.
Though the market has soared, we have seen moments of weakness in recent months. For example, late last year, investors worried about the valuations of AI stocks, and that weighed significantly on their performance. And at certain moments, investors have questioned the level of technology companies’ spending on AI — and whether the future revenue opportunity will justify it.
Today, seeing indexes soaring, you may be optimistic and expect more to come, or you might worry that such gains could lead to a major pullback or crash. In any case, history says doing one thing in particular will score you an investing win — even if the market crashes. Let’s check out this valuable investing move.
Today’s investing environment
We’ll start by taking a closer look at today’s investing environment. As mentioned, AI stocks have driven gains, but in recent times, they’ve also been a source of concern. Investors even rotated out of some of the biggest AI players earlier this year to favor companies seen as safer, such as healthcare stocks. The idea is that people always need medical treatments and healthcare services regardless of the economic backdrop.
Healthcare stocks were among the winners in the first half, with mega-cap companies Johnson & Johnson, UnitedHealth Group, and Eli Lilly each climbing in the double-digits.
All of this shows a certain level of caution among investors. Still, growth stocks, particularly those involved in AI, continue to soar — with some making incredibly steep gains since the start of the year. For example, memory companies Sandisk and Micron Technology were the top two performers in the S&P 500 in the first six months of the year, advancing more than 600% and 200%, respectively.
Though the concerns I mentioned above have persisted to some degree, corporate earnings have been strong — and, importantly, these AI players have spoken of sustained high demand. All of this has supported stock performance.
Stocks look expensive
Still, stocks overall look expensive, and we can see this clearly through the S&P 500 Shiller CAPE ratio, which today is at a level it’s only reached once before in the past — during the dot-com bubble.
S&P 500 Shiller CAPE Ratio data by YCharts
The Shiller CAPE ratio is a measure of stock price in relation to earnings per share over a 10-year period to account for economic shifts. So it’s a very accurate valuation tool. And today it says stocks are historically expensive. In the past, such levels have led to a decline in stocks.
S&P 500 Shiller CAPE Ratio data by YCharts
In any case, whether a downturn or crash happens soon or much later down the road, these periods do happen — they are part of the normal investing cycle. Now, let’s consider one move you can make to ensure an investing win. It’s really very simple: Hold onto your quality stocks throughout these tough times and for the long term.
History shows us that the buy-and-hold strategy has always worked. We can see this because the S&P 500 has always gone on to recover and grow after market crashes and other tough times.
^SPX data by YCharts
So, what you can do now is invest only in quality stocks that you believe in — and commit to owning them over the long term. History clearly shows that this is the key to scoring an investing win.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly and Micron Technology. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool has a disclosure policy.
