Should investors be nervous about the stock market?

Stock market jitters, triggered by tariffs and recent breakthroughs in artificial intelligence (AI) by a Chinese tech company, offer a stark reminder that even the strongest bull markets can stumble — particularly when certain stocks are priced to perfection.

The question is, does the sudden flare-up in volatility signal it’s time for investors to be more cautious? Or can the powerful market rally continue?

For Capital Group Chief Investment Officer Martin Romo, the short answer is yes. And yes.

“I think about the economy and markets today as a study in contrasts,” Romo says. While expectations for the U.S. economy remain upbeat, other economies are struggling. The impact of Trump administration tariffs and other policies add uncertainty to the picture, as do geopolitical tensions. Equity market returns have been robust and volatility low, but expectations are high.

“So in this environment, I am both constructive and cautious,” Romo continues. “I am thinking more about balancing opportunity with risk and being mindful of valuations.”

Here are four keys for investors looking to balance a constructive view of stock markets with a measure of caution:

1. We are in rarified air
Stocks have been on a tear since the end of 2022. While investors were bracing for a recession, the S&P 500 Index took off, soaring 26.2% in 2023 and 25.0% in 2024. It’s the first time the S&P 500 recorded consecutive years of 20%-plus returns since 1998–1999, the tail end of the dot-com bubble.

2. Market surprises are a fact of life
Elevated valuations, coupled with the heavy concentration of market gains in a handful of U.S. tech giants may be amplifying risk.

3. Downturns are regular occurrences
While declines are often jarring, it’s worth remembering that market volatility has been relatively tame. Against a backdrop of record-setting highs, the S&P 500’s largest intrayear decline in 2024 was about 8%, and the market rebounded within days.

4. It’s a good time for balance
Given this backdrop, it may be time for investors to seek a balance between growth of capital and capital preservation. What does that look like?

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