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The US stock market’s been a fairly strong performer so far in 2025, delivering an 11% total return since the start of January when looking at the S&P 500. But while double-digit gains are always worth celebrating, many institutional investors are now warning of an incoming market correction.
The chief analysts at Morgan Stanley, Deutsche Bank, Evercore, Societe Generale, and even several leading hedge funds are becoming bearish about what could be on the horizon. And while there are some varying opinions on severity, the general consensus points towards a 5-15% potential correction.
So what’s driving this negative short-term outlook? And what can investors do to prepare in case these bearish predictions turn out to be true?
Primary concerns
The top concerns right now revolve around the emerging impact of tariffs, economic weakness, and stretched valuations.
The latest inflation data from the US shows that manufacturers are holding off on passing higher input costs to consumers. But this delay is only expected to be temporary, with costs eventually being passed on to consumers – something that’s already started happening in specific sectors like food and electronics.
The fear is that these rising costs will put pressure on consumer spending, leading to slower economic growth and weaker business earnings.
That’s problematic for most companies. But it’s especially dangerous for investors holding shares in businesses trading at enormous premiums based on future growth. And with the S&P 500’s price-to-earnings (P/E) ratio now just over 27 versus its long-term historical average of 16, it’s easy to see why institutional investors are starting to get nervous.
Don’t panic
It’s important to remember that forecasts and never set in stone. The stock market’s notoriously difficult to predict, especially in the short term. And there remains the possibility that production gains from artificial intelligence (AI) investments could deliver wider margins in the coming quarters allowing earnings to catch up with stock prices.
But let’s assume the worst and say a correction’s coming. There are still plenty of smart investments that can be made. Not every US stock is grossly overvalued, and Morgan Stanley has recommended exploring opportunities in defensive sectors like healthcare.
One potential example to consider could be Johnson & Johnson (NYSE:JNJ). The healthcare giant has:
- A diversified revenue stream across medtech and pharmaceuticals that benefits from resilient demand
- A well-funded balance sheet with $18.9bn of cash & equivalents to weather any potential slowdown
- An impressive innovation pipeline of new treatments to support future growth
But importantly, Johnson & Johnson shares aren’t absurdly overpriced compared to other S&P 500 stocks, with its forward P/E ratio sitting at an undemanding 16.5.
To be clear, the healthcare giant isn’t a guaranteed winner. Like many of its peers, Johnson & Johnson has several key patents expiring over the next five years that could put pressure on sales. And tariffs on raw materials like steel and aluminium do have an indirect impact, given they could drive up the cost of critical equipment needed for drug research and manufacturing.
Nevertheless, investors concerned about a US market correction may still want to take a close look at this defensive enterprise.
