Stock Markets Corrections: why Markets Down

Dear readers, in recent days, both the US and Singapore stock markets are experiencing declines. The question on many minds is: why are stocks going down?

The answer, while layered, can be distilled into a fairly simple narrative of causation. Below, we unpack how a tech-led rally built on hype, global linkages and valuation pressures are converging to drive correction risk — and why that matters for markets in both the US and Singapore.

1. The narrow base of the US rally

In the United States, much of the recent market strength has been driven by the NASDAQ Composite (NASDAQ) and a handful of mega-cap technology names. These stocks have rallied sharply — not necessarily on the back of strong earnings growth, but rather on expectations of transformational change (especially around artificial intelligence, or AI).

This contributes to a fragile rally structure: when a market advance is narrow (few stocks carry the load), it is more vulnerable if one or more of those stocks disappoint or if investor sentiment shifts. In short: a concentrated rally is more exposed.

In this case, the technology/AI stocks are exhibiting characteristics of hype more than broad-based fundamentals.

2. How Singapore markets get pulled along

Singapore’s stock market is no island. As a relatively open economy, heavily connected to global trade and financial flows, the local market tends to follow the trends set by the US.

Specifically:

• When US equities are doing well, Singapore equities often benefit via global investor sentiment, capital flows and favourable spill-over.
• Conversely, when US stocks falter (especially large technology names), the “pull” on Singapore markets can reverse.
• Moreover, Singapore’s equities were already leaning bullish towards year-end, supported by initiatives such as those from the Equities Market Development Group (EMDG) aimed at bolstering Singapore’s equity ecosystem.
• But when earnings reports in Singapore disappoint, and international peers weaken, local investors may decide to lighten positions — which sets off a downward momentum.

Thus, the fall in the US often acts as a trigger or amplifier for the decline in Singapore.

3. Hype vs. earnings — the AI bubble risk

Returning to the US: the surge in AI-related stocks has created a perception of a new technological epoch, justifying sky-high valuations. But high valuations built on expectation, not earnings, are inherently risky.

When enthusiasm is decoupled from actual financial results — for example, if a tech giant reports weaker growth or guidance shortfall — sentiment can turn rapidly. Investors start to question the sustainability of earnings, re-assess valuations and adjust their positions.

Because Singapore equities are connected (either via tech exposure, global supply chains, or as part of global portfolios), that sentiment shift trickles across borders.

4. Valuation indicators flashing red: CAPE ratio & Buffett Indicator

Beyond the narrative of hype and tech concentration, two macro-valuation metrics are worth highlighting — both indicating elevated risk of correction:

a) The Cyclically Adjusted Price-to-Earnings Ratio (CAPE)

The CAPE ratio (also known as the Shiller P/E) takes a longer-term view by comparing current prices to average inflation-adjusted earnings over the past decade. Historically, elevated CAPE values have been associated with lower future returns and increased downside risk.

According to recent data, the CAPE ratio for the US market is at very high levels — pushing into ranges seen during prior major corrections.

b) The Buffett Indicator (Market Cap to GDP Ratio)

This is the ratio of total market capitalisation to GDP, popularly known as the “Buffett Indicator”. When markets are valued extremely high relative to the economy’s output, historically that has signalled elevated risk of a correction.

The ratio is currently well above historical averages, indicating that equity valuations may be running ahead of economic fundamentals.

In combination, when both CAPE and the Buffett Indicator are high, the risk of a market pullback or correction rises significantly.

5. Putting it all together: Why both US and Singapore are going down

Here’s how the pieces link up:

1. A narrow rally in US tech/AI inflated valuations.
2. The hype around AI drove investor risk-appetite and positioned markets for growth that may not yet be fully realised in earnings.
3. When earnings disappoint or growth slows, sentiment turns, prompting selling.
4. Singapore, as a price-taker with exposure to global capital flows, gets pulled downward when US markets stumble.
5. Elevated valuation metrics (CAPE & Buffett Indicator) indicate the markets were vulnerable and may be entering a correction phase.
6. The convergence of these factors means the recent downturn in both US and Singapore isn’t just random — it’s driven by structural vulnerabilities.

6. So, are we entering a correction?

Yes — the probability of a correction is materially elevated.

A correction, for context, is typically defined as a decline of about 10 % to 20 % from recent highs (distinct from a full bear market, which is usually 20 %+). Given current valuation levels, market concentration, and global linkages, both the US and Singapore markets are ripe for such a pull-back.

This doesn’t guarantee a crash — markets can stay elevated longer than expected — but the odds of a cooled-down phase are elevated.

7. What this means for investors

For investors in Singapore (and globally) the current environment warrants caution and discipline:

• Re-assess exposure: If you hold significant positions in tech/AI stocks (US or Singapore), consider whether the valuations reflect realistic earnings.
• Diversify: Reduce concentration risk by diversifying across sectors, geographies and asset classes.
• Stay informed: Monitor earnings updates, sentiment shifts, global macro triggers (like interest rate policy, geopolitical risk).
• Avoid being driven purely by hype: The rally has been partly narrative-driven; confirm that earnings growth backs the story.
• Have a plan: If a correction occurs, will you hold, add, or reduce? An advance plan reduces emotion-based mistakes.

8. Singapore-specific considerations

For Singapore investors in particular:

• The local market benefits greatly when global markets are bullish — but the reverse is true when global markets decline.
• Corporate earnings in Singapore can be impacted by external factors (global demand, supply chains, interest rates).
• Singapore government initiatives such as the EMDG bolster optimism, but cannot fully offset global valuation pressures and sentiment shifts.
• Liquidity and risk appetite matter: global flows in/out of emerging or smaller markets amplify swings.

9. Final thoughts

We are likely in a phase where the US and Singapore stock markets are not just pulling back temporarily — but may be undergoing a broader correction. The root causes are:

• Tech/AI-driven concentration in rallies.
• Valuations outpacing earnings and economic output.
• Global linkages making Singapore a follower of US market moves.
• Sentiment shifts as reality tests the hype.

For prudent investors, this environment is a warning signal — not necessarily cause for panic, but certainly reason for heightened awareness and thoughtful positioning.