AI stocks are soaring. Are you doomed to fall?
The tech and AI giant is hitting new market highs, but some analysts are warning that the rally will be short-lived.
The stock market is soaring. Some analysts say it’s too expensive.
Many Wall Street observers are warning that the stock market may be entering “bubble” territory. This is similar to the overvalued markets of 2008 and 1999, when the bubble burst and the market crashed.
Lately, there’s been talk about the AI bubble, or the enthusiasm for artificial intelligence that is driving up the prices of tech stocks. Those concerns are part of the reason why stocks slumped in late November despite a series of strong earnings reports.
When investors fear a decline in stock prices, their thoughts may turn to taking money out of the market and putting it in cash, such as money market funds, Treasury bills, or even regular savings accounts. The see-saw phenomenon of stock prices fuels their ennui.
“Many of my clients have been calling me in panic this week,” Monica Dwyer, a certified financial planner in West Chester, Ohio, told USA TODAY in October.
For long-term retirement savers, withdrawing money from the stock market is not a decision to be taken lightly.
Is now the time to save up cash? We’ll get to that question in a moment. But first, let me explain why I ask this question.
Stock prices are breaking records. Is it too expensive?
In 2025, stock indexes are breaking records. This is not unusual. The stock market tends to rise.
What’s unusual, economists say, is the historically high ratio of stock prices to corporate profits.
The price-to-earnings ratio indicates whether a stock is overvalued or undervalued. A common measure, the economy-adjusted price-to-earnings ratio (CAPE ratio), is 38.55 for the S&P 500.
The last time it was this high was during the peak of the dot-com bubble in 1999-2000. The CAPE ratio also spiked in 1929, just before the Great Depression.
Are we in a stock market bubble?
Are we in a new bubble? Will the market crash? The answers to these questions depend on who you ask.
Fed Chairman Jerome Powell warned in a speech in September that stocks were “pretty overvalued.” Chairman Powell told many in the audience that stock prices were too high. Powell appeared to retract his statement in October.
“There are a lot of assets that look like they’re entering bubble territory,” JPMorgan Chase CEO Jamie Dimon told reporters in a market commentary on Oct. 14.
Every day or two, another op-ed or financial headline reminds us that we may be living in a new bubble, fueled by unrealistic expectations about the profitability of AI. Other experts disagree, arguing that companies are profitable and the market is fundamentally healthy.
AI and big tech have been driving the big stock gains over the past decade. According to The Motley Fool, the Magnificent Seven’s total return from 2015 to 2024 was 698%. At the time, the overall S&P 500 returned a relatively low 178%.
Analysts say if we were in a bubble, these stocks helped inflate it.
Many investors are already turning to cash. Money market funds held a record $7.7 trillion in assets in September, The Wall Street Journal reported.
Money market funds are generating higher returns than in the past. Some investors are content to stay on the sidelines, as the stock may be overvalued.
But that doesn’t mean everyday investors should cash out their stocks and cash every dollar.
The dangers of timing the market
This is the theory. If you exit a “bubble” market at a high, you can wait until the market falls and then put your money back into stocks to buy on the edge.
It definitely sounds like it. But investment experts warn that timing is difficult.
“When you’re trying to avoid a recession, the risk of making a mistake is very high,” says Peter Lazarov, a certified financial planner in St. Louis. “And you have to get it right twice.”
As Lazarov explains, you have to make two decisions: when to sell high and when to buy low. That requirement is more difficult than you might think.
Sell high? A market can close at a record high one day and set a new record the next day. You won’t know until the peak has passed.
Buy cheap? Due to the Great Recession, the Dow lost more than half of its value from 2007 to 2009. If we had bought back sometime in 2008, we would have missed the bottom.
“The problem is, we’ve seen over and over again that it’s very difficult to implement that kind of approach in practice,” said Amy Arnott, portfolio strategist at Morningstar. “You end up missing out on some profits.”
Cash reserves help you “buy cheap”
But there’s nothing stopping you from having cash on hand to protect against stock market booms.
Financial advisors regularly tell older clients to reduce their stock holdings as they approach retirement. The idea is to protect yourself from the market’s inherent volatility and ensure you have enough cash to cover your expenses during economic downturns.
Zaneilia Harris, a certified financial planner in Washington, D.C., told USA TODAY in October. “You don’t have to pull out of your portfolio when it’s going down in case you need something.”
Harris said younger investors and those saving for retirement may consider setting aside cash, even if it’s only a fraction of their investable amount.
If the stock price falls, anyone with cash has the opportunity to buy the stock at a discount.
“If you don’t have cash to put into the market when the market is down, you’re missing out on opportunities,” Dwyer said.
If the market declines, even cash-strapped investors may take advantage of sale-priced stocks.
“If you don’t have cash on hand and you see a significant market decline, increase your 401(k) contributions by 1 to 2 percentage points,” Dwyer said. “You probably won’t even notice it.”
Higher 401(k) contributions mean you can earn more discounted stocks during a recession. This is another way to buy cheaply.
