These 3 Big Risks Could Cause the Next Bear Market. I'm Investing Anyway.
Investing in the stock market means you always have to keep an eye out for risks. Stocks don't always go up. Sometimes we have to contend with a long-term bear market, in which stocks fall 20% (or more) from recent highs.
The most recent bear market was in 2022, when the S&P 500 index (SNPINDEX: ^GSPC) declined about 18% for the year on a total return basis. The tech-heavy Nasdaq-100 did even worse, with a loss of about 32% by total return.
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Could we be on the verge of another 2022-style stock market crash? No one knows for sure, but there are a few reasons to be wary. Here are a few of the biggest risks facing today's stock market -- and why I'm investing anyway.
Risk 1: AI topheaviness
Artificial intelligence (AI) has become the biggest growth driver in the U.S. stock market. Goldman Sachs (NYSE: GS) research from September found that the largest AI hyperscalers had spent about $800 billion in capital expenditures since the beginning of the year, and almost 50% of S&P 500 companies' earnings-per-share growth in 2026 came from AI-related investment. Tech and AI-related stocks make up about 45% of the S&P 500.
Can this AI-related spending boom keep going? What if it slows down? What if the most influential AI companies fail to deliver the hoped-for profitability from AI tools?
Risk 2: Rising interest rates
The Federal Reserve hiked interest rates in September and may do so again by the end of 2026. Longer-term interest rates based on government bond yields, like the 10-year Treasury yield, have spiked in 2026. (The 10-year Treasury yield has risen about 0.92% in the past year.) This could slow the economy, as consumers and businesses face higher borrowing costs.
Are higher interest rates enough to push the economy into recession or hurt stock prices? Not necessarily. But they are a risk factor. When bonds start to deliver higher yields, stocks become less attractive to investors. This can hurt share prices, at least in the short run.
Risk 3: Historically high valuations
The stock market's recent run of success might also be creating a new risk factor. According to the cyclically adjusted price-to-earnings (CAPE) ratio, which uses a 10-year average for earnings, the S&P 500 looks richly valued compared to historical averages. This ratio has recently been hovering at levels that it hasn't reached since 2000 -- right before the dot-com crash.
