Jeremy Siegel does not think the overall stock market is overpriced. He does think one corner of it could take a beating.
“I could certainly see a 20% to 30% correction in Nasdaq,” the Wharton professor emeritus and WisdomTree senior economist wrote in his late-October commentary.
His trigger is specific: artificial intelligence spending, or demand for it, falling short of expectations. In that case, he wrote, the S&P 500 might drop only 5% to 10%, because lower long-term interest rates would cushion other parts of the market.
“I am not predicting anything resembling the technology collapse of 2000,” he added, noting that Nasdaq trades at roughly 22 to 24 times forward earnings (stock prices divided by the profits companies are expected to earn over the next year), compared with about 100 times at the 2000 peak.
The spread between those two scenarios is what matters for a retirement account. The same bad news could cost one saver a few percent and another several times that, depending on what sits inside their funds.
An index fund can be more tech-heavy than it looks
The S&P 500 is weighted by company size, so the biggest firms carry the most influence. As of Sept. 30, the 10 largest holdings made up 39.1% of the index, according to S&P Dow Jones Indices. The largest, Nvidia, accounted for 8.4% on its own.
Nine companies fill those top 10 slots, because Alphabet appears twice for its two share classes. All nine, including Apple, Microsoft, Amazon, Broadcom, Micron, Meta and Tesla, trade on the Nasdaq, and most are at the center of the AI buildout Siegel describes.
That concentration flows into funds many savers hold without a second look, from S&P 500 index funds to the stock portion of target-date funds. Own an S&P 500 fund, a Nasdaq-100 fund and a large-cap growth fund, and you may own the same handful of companies three times over.
Siegel’s answer is diversification
Siegel argues that an AI disappointment would hit asset classes differently. Lower yields would help value stocks, which, he wrote, “should hold up much better.”
In his view, diversification “may be one of the most effective ways to navigate the next phase of this market.”
He also expects the swings between growth and value stocks to continue, and he considers a Federal Reserve rate hike in December highly likely.
How to see your own exposure
- Pull the top 10 holdings for each stock fund you own. Fund fact sheets list them, along with each one’s share of assets.
- Add up the overlap. If the same names lead every fund, your real exposure to them is higher than any single fact sheet shows.
- Compare your stock-and-bond mix with your target. The SEC’s investor guidance describes rebalancing on a set schedule, such as every six or 12 months, or when an asset class drifts past a preset percentage.
- Make trades inside an IRA or 401(k) when you can, since buying and selling there does not trigger capital gains tax. In a taxable account, steering new contributions toward underweighted funds may cost less than selling.
Funds that track value stocks, equal-weight indexes, international markets or bonds behave differently from the AI leaders, though none is guaranteed to hold up in a given downturn. After a strong year, trimming winners back to your target mix also forces you to sell some shares at high prices.
Timing matters most near retirement
A 25% drop hurts more if it hits the year you start withdrawals. Selling shares to cover living costs while prices are down leaves fewer shares to benefit when the market recovers. Planners call that sequence-of-returns risk, and it is a reason to keep money you will need within a few years out of stocks.
If you have $100,000 or more in investments and your accounts have grown to the point where a 20% swing means real money, a second opinion can help. SmartAsset matches you with up to three vetted fiduciary advisors, who are required to act in your best interest, and the service is free with no obligation.
Expect a questionnaire that takes about 10 minutes and asks for a phone number near the end; you decide whether and when to respond to any advisor. SmartAsset handles the matching, and advisors provide the advice.
Siegel’s valuation comparison is the reassuring part: 22 to 24 times earnings is a long way from 100. His scenario still calls for a 20% to 30% drop in the companies that dominate many retirement accounts. Whether that becomes a 5% bruise or something deeper in yours depends on what you hold before it happens.
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