Stock-market crash: will the S&P 500 bubble burst or deflate?

After outstanding returns in five of the past six years, the S&P 500 looks toppy. With its valuation stretched by big tech stocks, is a crash inevitable?

Posted by

Cliff D’Arcy

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in

Having followed financial markets since the 1980s, I’ve witnessed four stock market crashes. My first was Black Monday — 19 October 1987 — when the Dow Jones Industrial Average shed 508 points (22.6%) overnight. Ouch.

Market meltdowns

My second major meltdown was the ‘dotcom bubble’ bursting in 2000-03. From end-1999 to 12 March 2003, the FTSE All-Share Index plummeted by 50.9%.

My third financial collapse? The global financial crisis of 2007-09. From 25 June 2007 to 3 March 2009, the FTSE All-Share Index crashed by 48.6%. Fortunately, I warned many times of this coming chaos, vastly reducing my losses during this bear market.

My fourth stock-market crash was the Covid-19 ‘flash crash’ of spring 2020. The FTSE All-Share Index slumped 37.2% from 17 January to 19 March. Having put 50% of my family fortune into cash at end-2019, I gobbled up great stocks at bargain prices during this rout.

Bubble and squeak

Discussing US stock valuations recently, a friend offered a misquoted comment from former Manchester United manager Sir Alex Ferguson. Arguing that American equities were priced for perfection, he warned this could be ‘squeaky bum time’ for global investors.

Reviewing the S&P 500, I agree. The leading US stock-market index trades on an elevated price-to-earnings ratio of 23.9 times historic earnings, well ahead of its long-term average. Also, its dividend yield of 1.3% a year is modest, reflecting American companies’ reluctance to return cash to shareholders.

In contrast, the UK’s FTSE 100 index seems cheap as chips to me. It trades on 14.7 times trailing earnings and offers a dividend yield of 3.6% a year — a useful cash stream for value and income investors, including me.

Bang or hiss?

Lacking a crystal ball, I have no idea whether the US stock market bubble — if it truly is a bubble — will burst or gently deflate. Indeed, I expect the S&P 500 to hit higher highs before financial gravity’s pull. Also, future declines might last a week, a month, a quarter, or a year. Who knows? What I do know is that buying quality stocks during bearish periods usually pays off handsomely over time.

Silicon value

Right now, the S&P 500’s valuation is inflated by the highly rated stocks of the Magnificent Seven mega-cap tech firms. In particular, Elon Musk’s carmaker Tesla and Jensen Huang’s chipmaker Nvidia trade on sky-high earnings multiples.

However, one ‘Mag 7’ member seems an outstanding value stock to me. It is Alphabet (NASDAQ: GOOG), owner of all-powerful search engine Google. After recent share price falls, Alphabet has dropped to fifth in the league table of US-listed Goliaths.

At its 52-week peak, the Alphabet share price hit an all-time high of $208.70 on 4 February. As I write, it stands at $171.75, down 17.7% in four weeks. This values this tech Titan at $2.1trn — a valuation driven down partly by a federal anti-trust investigation into its dominance in online advertising.

For me, this fall pushes this well-known stock well into ‘Silicon value’, trading on 21 times earnings with a dividend yield nearing 0.5% a year as a bonus. I’d buy big into Alphabet today, had we not bought this stock at its five-year low in November 2022. Of course, anti-trust issues and slower earnings growth could batter this stock, but we will keep tight hold of our high-performing Alphabet shares!

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for growth on your initial investment, then keep watching and waiting.

The Biggest Retirement Worries: Do any of these sound familiar?

I think I have enough to retire… but what if I don’t?
A market crash could wipe me out – then what?
I don’t want to sell stocks just to pay the bills.
My dividends aren’t nearly enough to live on.
My income is lumpy and unpredictable.
I don’t trust Wall Street’s cookie cutter advice.
If you nodded along to any of these, you’re not alone.

But here’s the good news – there’s a smarter way to unlock steady, reliable dividend income without gambling your retirement on the market’s next move.

This 7.6% Tariff-Proof Payout Shrugs Off Geopolitics

Brett Owens, Chief Investment Strategist
Updated: March 5, 2025

Uncertainty appears to be the theme of 2025. From tariffs to geopolitics, we have a nonstop flow of news that has vanilla investors quite rattled.

CNN’s Fear and Greed Index dipped back into the Extreme Fear zone earlier this week. Markets don’t like ambiguity. But that does not mean that we income investors need to sell everything. Heck, or anything ! This is a split stock market and we contrarians are rolling with the dividend victors.

Things have the potential to get wild. Fortunes made; retirements lost.

Thus far our Contrarian Income Report portfolio is doing quite well because we have smartly sidestepped ambiguity. Why place wild bets when we have safe monthly dividends that are steadily adding to our nest eggs?

Let’s talk about a sizzling 7.6% yield, paid every 30 days, that is another big winner from the energy revolution. Remember, we have a few megatrends converging in one direction here, so we want to maximize our dividend exposure. These wheels in motion are not affected by tariffs or geopolitics, either.

First, more electric vehicles (EVs) are hitting the road. The global market for EVs is projected to triple by 2033, regardless of the political, geopolitical or tariff environment. EVs create more demand on the power grid, period.

Adding to the grid’s grind is AI. Every week we see a new “must have” model released from leading technology companies. The newest shiny object is the latest and greatest version of ChatGPT, version 4.5. It puts DeepSeek back in its place.

But GPT 4.5 already has a reputation as a processing hog. It uses a lot of servers—aka juice. Power.

Electricity demand from data centers powering apps like ChatGPT already accounts for 5% of total US consumption. New models like GPT 4.5 will boost this demand massively further.

Boring old utilities are big winners. We called out Duke Energy (DUK) as a “power play” at the intersection of these megatrends. Duke’s operations fuel data center expansion for tech hubs in Florida and North Carolina.

DUK pays 3.6%, which is “cute”—not even half of the scorching 7.6% divvie dished by Cohen & Steers Infrastructure Fund (UTF). DUK, by the way, is UTF’s six-largest position. The closed-end fund (CEF) owns 272 stocks that are all well-positioned to benefit from the joint boom in EVs and AI.

UTF’s Sweet, Steady Monthly Dividend

UTF’s status as a closed-end fund (CEF) explains the yield “anomaly.” Normally, it would take a stock market crash of epic proportions for us to see a 7.6% dividend paid by a utility ETF, or blue-chip name. In CEF-land, however, these deals arise because CEFs fly under the mainstream radar.

CEFs are too small for big institutional money. UTF has about $2 billion in assets under management. That’s a pond that is plenty big for us but too small for “whales” like pension funds.

Too bad for them ! As a result the 7.6% dividend deal sits there for individual investors like us. UTF does tend to be volatile due to the erratic nature of vanilla retail holders. The fund is trading 6% off its recent highs. We welcome this buyable dip.

Longtime CIR subscribers know the fund well. The first time we bought and held UTF we enjoyed 95% gains. This is our second go round and we have already been treated to 37% total returns and counting. (And many of the profits were delivered to us in the form of UTF’s neat monthly payout!)

Plus, new rate trends are a tailwind for both UTF and the stocks it holds. Utilities behave like “bond proxies,” which means they rally as interest rates (especially long rates) fall. And rates are dropping because of the two “T’s”—tariffs and the Treasury Secretary.

First, tariffs. Headline readers believe they are inflationary but the data show that trade wars slow economic growth and thus bring lower rates. The 10-year Treasury yield has already fallen nearly 30 basis points since we talked about this phenomenon just two weeks ago!

Second, Treasury Secretary Scott Bessent is focused on lowering the 10-year Treasury yield. Bessent explicitly said: “ ? The president wants lower rates. He and I are focused on the 10-year Treasury.”

This is the first time in recent memory a Treasury Secretary has called out this benchmark yield as a goal. It is a notable shift from Trump 1.0, when the president was focused on lower short-term rates viathe Fed. The bond market has taken note of Bessent. The 10-year yield is a full 50 basis points lower since he was nominated!

Plus, UTF will benefit from lower borrowing costs going forward. The fund employs 29% leverage, paying an interest rate that is tied to short-term rates. As long rates ease further and the economy slows from tariffs, short rates will drop too. This will be a nice savings on interest payments for UTF—another tailwind for its sweet 7.6% dividend.

High hopes
Why the infrastructure sector is coming of age for income-seeking investors….
Jo Groves
Kepler
Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Sequoia Economic Infrastructure Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

As Geoffrey Chaucer opined many centuries ago, all good things must (sadly) come to an end. After a stellar run from the Magnificent Seven and a spell of attractive yields fuelled by higher-for-longer rates, investors may now be considering whether it’s time to reposition their portfolios to take advantage of a shifting market cycle.

While the gravy train isn’t hitting the buffers just yet, current forecasts suggest it may well be slowing down. First up is a projected moderation in returns from US equities, with BlackRock forecasting an annualised return of just 5% over the next decade, raising concerns that the AI frenzy may have borrowed from future returns, as we saw after the bursting of the dot.com bubble.

Elevated interest rates have also provided a boon for income-seekers in recent years but with rate hikes reversing, the landscape is changing. Gilts are forecast to deliver a solid annualised return of 4% but the equity and bond market rout of 2022 underscored the vulnerability of relying solely on a traditional 60:40 portfolio.

For investors looking beyond traditional assets, direct lending offers the potential for higher yields than bonds and equities, with a forecast annualised return of 9% over the next decade, underpinned by their illiquidity premium.

Within this, private infrastructure debt offers attractive risk-adjusted returns and built-in inflation protection as returns are driven by contractual cash flows rather than market sentiment. This presents an opportunity to lock in high yields over the medium term while gaining exposure to a defensive asset class with robust downside protection.

Coming of age
Infrastructure has matured significantly as an asset class over the last decade. Private equity infrastructure funds under management have grown by 17% annually since 2013, hitting almost $1.2 trillion in global assets under management, while private debt funds under management have expanded at an impressive annual rate of 27%, according to Preqin.

On the debt front, constrained fiscal capacity has led governments to rely on private capital to fund the necessary build-out and renewal of infrastructure. This has been further compounded by the decline in traditional bank lending to the sector following the global financial crisis.

As a result, private equity funds and infrastructure companies have turned to private infrastructure debt, which typically yields between 9-12%, to optimise their capital structures and meet target returns.

Why it pays to be active
Retail investors face barriers to accessing private infrastructure debt relative to publicly-traded bonds and equities. Moreover, it requires specialised expertise to structure, carry out due diligence and monitor complex deals, which can’t be replicated by passive strategies.

For investors seeking active exposure to the sector, Sequoia Economic Infrastructure Income (SEQI) aims to provide equity-like returns and high cash dividends by offering private debt for infrastructure projects backed by tangible physical assets.

High yield

One of the standout features of SEQI is its high yield: the average portfolio yield (to maturity) is currently 9.7% (as at 31/01/2025), well above its 7-8% target, thanks to strong asset selection and disciplined portfolio construction.

While the trust owns private assets, its net asset value (NAV) is externally valued by PwC on a monthly basis which should provide confidence in valuations.

In addition, while loans may be ‘marked-to-market’ over their life, this is a largely theoretical exercise, creating potential upside when loans ‘pull-to-par’ and revert to their original value at maturity. As my colleague recently noted, this represented a potential gain of 4% of NAV (as at 31/12/2024).

Access to industry experts

SEQI has a 20-plus investment team with a strong track record in origination, having made over 250 investments in the last nine years, including more than 100 in the US. This expertise enables SEQI to source high-quality deals, negotiate strong protections and proactively manage risks, ensuring resilience across economic cycles and changing market conditions.

While infrastructure debt generally features lower loss rates and higher recoveries than corporate credit, SEQI’s team brings added security through their extensive experience in credit work-outs and restructuring, contributing to a below-average loss rate compared to broader corporate credit without the benefit of the defensiveness of infrastructure-related cash flows.

Diversified portfolio

SEQI provides investors with broad diversification across 10 high-quality OECD jurisdictions, 8 sectors and 40 infrastructure sub-sectors, as shown in the graph below, which differentiates it from peers concentrating on specific sectors such as onshore wind or healthcare.

High-level of sector diversification
Source: SEQI factsheet, based on portfolio allocation at 31/01/2025

This diversification allows the fund to be highly selective by targeting only the most attractive opportunities within each sector and maintaining low correlation between assets. By way of example, hydroelectric power, data centres and student accommodation each benefit from unique and distinct growth drivers.

With an average duration of less than four years, SEQI also recycles capital on a regular basis, keeping the portfolio fresh and enabling strategic allocation to high-growth markets while avoiding risks such as overcapacity in power sectors.

By maintaining a flexible and selective strategy, SEQI provides a well-balanced, resilient portfolio that captures growth across multiple infrastructure themes, ranging from replacing ageing transport and utility infrastructure to the expansion of emerging technologies.

Harnessing mega-trends

SEQI is also well-positioned to capitalise on strong structural growth drivers, including digitalisation and decarbonisation.

The rapid rise in AI and cloud computing power demand is driving an unprecedented requirement for hyperscale data centres, with Amazon, Alphabet and Microsoft alone committing to spend more than $250 billion on capital expenditure in 2025. As a result, data centres account for the largest sub-sector in SEQI’s portfolio.

Another key growth driver is decarbonisation with the International Energy Agency (IEA) estimating that global clean energy investment will need to more than triple to $4 trillion per year by 2030.

SEQI’s portfolio is well-positioned to capitalise on this soaring demand for clean energy infrastructure, with almost a quarter of the portfolio invested in renewables and power infrastructure, including natural gas generation which is expected to be required to balance out the variability of wind and solar in the decades ahead, on the back of the phasing out of coal-fired generation in many mature markets.

Other parts of SEQI’s portfolio address additional investment priorities such as aging societies (healthcare diagnostics), urbanisation (rail) and education (student living). With government funding seemingly diverted towards social support and defence initiatives, there may be a sustained reliance on the private sector to provide funding for these themes.

A decade of outperformance
SEQI’s long-term track record is testament to the benefit of active management for investors looking for exposure to infrastructure debt. As the trust nears its 10-year anniversary, it has achieved a NAV total return of 77% since IPO, compared to a 37% total return for a global high-yield bond index (based on the iShares Global High Yield Corporate Bond GBP-hedged ETF, as at 31/01/2025).

In addition, the trust is currently trading on a discount of 18% to NAV (as at 03/03/2025), which could provide a kicker to returns if the discount narrows. As a result, this could present an attractive entry point for investors seeking exposure to a high cash yielding strategy with distinctly defensive diversification benefits in today’s volatile economic environment.

City of London

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by City of London. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

CTY appears well-set to continue to deliver on its objectives…

Overview

City of London Investment Trust (CTY) aims to deliver income and capital growth through a cautious investment strategy that is typically focussed on larger UK-listed equities. Job Curtis has been the trust’s manager over the past 33 years, a tenure that gives him huge experience with which to navigate markets and economic cycles.

It is his success in delivering steady outperformance over the long term, as well as CTY’s unrivalled track record of delivering successive dividend increases for 58 years, that has allowed the trust to build a strong following amongst investors, enabling it to grow and benefit from economies of scale. The most recent OCF is 0.37%, which makes CTY highly competitive.

With a mix of higher yielding stocks as well as lower yielders that have higher growth potential, Job remains convinced of the quality and attractive valuations of the companies in the CTY portfolio. It is this backdrop that has led Job to gently increase  Gearing to c. 8% currently.

As at 31/01/2025 CTY’s NAV had outperformed the benchmark over one, three and five years. As we discuss in the Portfolio section, the strong track record comes not from any investment heroics, but in our view is more a result of Job’s risk-averse approach to stock picking. Job likes to ensure that CTY is always exposed to a broad spread of investments, which is complemented by Job’s valuation-based investment framework, focussed on quality companies but sometimes with a contrarian tilt. Generally, capital invested in each company corresponds not only to Job’s estimation of the share price relative to fair value, but also his confidence in the quality and future trajectory of the dividend.

Analyst’s View

CTY is the biggest and cheapest trust of its peer group, with the longest track record of dividend increases (of any trust): in every sense the superlative of the UK Equity Income sector. The dividend yield is currently 4.7%, well ahead of the benchmark and peer group average, and the board’s clear focus on discount control means that historically the share price has closely reflected the characteristics of the NAV – something that can’t be said of some investment trusts. Additionally, low-cost long-term gearing should confer a steady advantage to the trust over many years to come. As such, in our view CTY continues to be advantageously set up to deliver on its income and capital growth objectives for shareholders.

These attractive characteristics have not been missed by investors, and over the past ten years CTY has issued shares at a premium to NAV, boosting returns for existing shareholders and leading to economies of scale and a progressively lower OCF. Indeed, over the decade to 30 June 2024, the share count has increased by a total of c. 76%. However, over much of 2024 and so far in 2025, CTY’s shares have traded at a small discount in absolute terms, a symptom of negative market sentiment towards the UK. In our view, for long-term investors wishing to take advantage of the inevitable cyclicality of sentiment, CTY is worthy of consideration. Indeed, as the chairman observes in the recently announced interim report, the dividend yield of 4.7% Portfolio section means shareholders are “paid to hold on” until the UK sees a change in sentiment, and potentially an improvement in valuations.

Bull

• Very low OCF of 0.37%
• Consistency and experience of manager who has delivered long-term outperformance of the FTSE All-Share Index in capital and income terms
• Track record of 58 years of progressive dividend increases

Bear

• Cautious approach means that NAV can underperform in some market conditions
• Income track record highly attractive, so manager might risk long-term capital growth in trying to maintain it
• Structural gearing can exacerbate the downside

££££££££££££££££££

GEARING

The company borrows money at x and re-invests hoping to make xx. In a rising market it’s a positive but in a falling market it’s a negative.

Either way u receive and enhanced dividend.

The Snowball’s fcast is for income of £9,120.00.

The comparison share VWRP would today, using the 4% rule provide income of £5,889.00

VWRP may be higher at the end of the year but it could be lower, it’s a gamble.

VWRP is back to the 2024 November price range so has provided no income for your portfolio since then.

Next week there will 2k of shares xd including cash, currently earmarked for re-investment in NESF, SEIT but that could all change.

Dividends can be more reliable than share prices as they’re driven by
the companies performance itself and not by the whim of investors.

As part of a total return / reinvestment strategy, this income could be
reinvested into income assets or back into the equity market
depending on the relative valuations.

The emotional benefits of dividend re-investment.
In fact, with this investment strategy you can actually welcome falling share prices.

There seems to be some perverse human characteristic that likes to make easy things difficult.
WB

William Heathcoat Amory

Kepler

Updated 06 Mar 2025

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Greencoat UK Wind. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

• UKW’s NAV total return, which had been previously announced, was -8.5% for the year to 151.2p per share, with the most significant movements from downward power price forecasts, largely seen in the first half, and a revised expectation on long term wind speeds, announced with the Q4 NAV on 29/01/2025. The final results provided more colour on this, which has seen a number of recent years wind speeds incorporated into the data, serving to lower expected long term electricity generation by 2.4%.
• UKW maintained its portfolio valuation discount rate at higher levels, with the forecast return to investors being a 10% return on NAV (net of all costs).
• Over 2024, electricity generation was 5,484GWh, 13% below budget owing to low wind and lower availability, with a notable export cable failure at Hornsea 1 in the first half of the year. This represents c. 2% of the UK’s electricity demand, and is enough to power 2m homes, avoiding 2.2m tonnes of CO2.
• Underlying dividend cover for 2024 was 1.3x on a normalised basis. The board is targeting a dividend of 10.35p per share with respect to 2025, a rise in line with December’s RPI of 3.5%. This is a twelfth consecutive increase by RPI or better, making the UKW one of very few FTSE 250 constituents to increase its dividend each year for the past decade.
• UKW completed a £725m refinancing of its RCF and near maturing term loans in September 2024 with its existing set of lenders. The Company reduced the size of its RCF to £400m (down from £600m), of which £270m was drawn at 31/12/2024. The next maturing term facility expires in November 2026. The refinancing was well supported by UKW’s existing lender base, demonstrating a strong demand for UKW credit.
• During the year, UKW divested partial stakes in two wind farms for £41m, and made a £14.25m highly accretive follow on investment in Kype Muir Extension, taking its stake to 65.5%. During 2024, UKW bought back 59.2m shares, and subsequently announced it had completed its initial £100m buyback programme.
• Over the next five years, UKW expects that excess cash generation will exceed £1bn, and that additional capital will be available through further disposals. The Company has initiated a further share buyback programme of £100m. Remaining excess capital will be applied dynamically and allocated between further, or accelerated, share buy backs and repaying debt to reduce gearing.
• At the 2024 AGM, the Company held a Continuation Vote, at which 11% of shareholders voted in favour of discontinuation, and therefore the resolution confirmed continuation. Given the shares have traded at a discount greater than 10% on average during 2024, a continuation vote will also be held at the 2025 AGM, which will take place at 4pm on 24/04/2025.
• As part of a phased succession process Stephen Lilley will be stepping down after the 2025 AGM. Matt Ridley will be joined by Steve Packwood as investment managers of the business. The other key figures in the Investment Manager’s team dedicated to managing the Company remain unchanged.

Kepler View

2024 has been a tough year for the renewable energy infrastructure sector, and Greencoat UK Wind (UKW) has not been immune from sectoral headwinds. Lower power prices and lower inflation have both been negatives, yet bond yields remaining stubbornly high has meant that there has been no offsetting reduction in discount rates. Operationally, lower wind resource has been compounded by an issue with the Hornsea 1 wind farm (the largest asset, now fixed), and as a result electricity generation has been below budget. Despite this, it is heartening that UKW’s normalised dividend cover is 1.3x, which illustrates the resilience built into UKW’s model. Shareholders have continued to receive their dividends, which at the current share price of 113.75p, yield 9.1%.

Over the year, surplus revenues and proceeds from disposals (achieved at NAV), have enabled the bulk of the £100m share buyback programme to be executed (it was formally completed on 14/02/2025 a fortnight before the annual results were published). The board’s continued confidence in the model is illustrated by their commitment to continue the trajectory of the dividend, which sees the target dividend increase in line with the December RPI figure. This has been achieved every year since listing, except for 2024 which saw the increase significantly more than RPI. A further positive for sentiment is the announcement of the new £100m buyback programme which, according to the results announcement, may be upsized depending on the results of disposals. With gearing near the soft limit of 40% of gross asset value, proceeds from disposals will likely be weighed against reducing borrowings. As highlighted in the results call, the board and manager are focused on doing what is right by shareholders, and see realizing assets and buying shares back at the current discount as a highly accretive. The announcement on 10/12/ 2024 is another example of UKW implementing shareholder friendly initiatives. Management fees from 01/01/2025 run on the lower of market capitalization and NAV. This level of fee reduction is, as yet, unmatched by UKW’s peers. The manager is therefore even more strongly aligned with shareholders in the desire to see the share price improve.

With the levered portfolio prospective NAV total return standing at 10% post fees, we think UKW continues to look attractive on a risk adjusted basis against many other investment opportunities. The discount has moved narrower from the widest point seen last week, and UKW’s share price should benefit from any further disposals achieved. Most importantly, the board and the manager continue to demonstrate their commitment and alignment to take the appropriate actions in the long term interest of shareholders. In the meantime, shareholders stand to receive an attractive covered dividend delivered by UKW’s resilient business model.