Teresa Rivas

August is a time for ice cream, sunscreen, vacations, and...volatility?

The S&P 500 has 15 record closes under its belt this year, and the Nasdaq Composite, 16. Blockbuster earnings from big tech -- the engine of the rally -- is fueling further gains, with the Federal Reserve's hawkish Wednesday remarks ancient history.

Investors might be right to keep letting their risk-on bets ride, but there are a few reasons to think about cashing in on at least some winnings.

Price may be one of them.

Yes, valuations are less predictive in the era of surging artificial intelligence, and no , tech doesn't look as frothy as it did before the dot com bust. However, with the S&P 500 trading hands at more than 22 times forward earnings, ahead of the historical average, it does give some pause, argues Wolfe Research Chief Investment Strategist Chris Senyek.

"While we don't believe we're in a full-blown bubble just yet, asset prices are at or near all-time highs in many areas including stocks, U.S. housing, crypto, private market AI valuations, Rolex watches, etc." he writes. Moreover with ever-expanding AI spending, spending related to the Big Beautiful Bill, and political pressure on the Fed to cut interest rates, "the seeds are potentially being sown for [a] bubble to form or, at the very least, for a 'run hot' economy over the next 12 months," he warns. "Although we remain positive on the U.S. growth outlook, stocks are priced for perfection and the market's failure to power higher in the face of strong earnings per share results leaves us wanting to take some profits over the near-term into weaker seasonality."

Even bulls note that even when conditions are good, stocks don't only move in one direction.

Wells Fargo Investment Institute Head of Global Fixed Income Strategy Brian Rehling notes that stocks' momentum is underpinned by strong profits, steady labor market, and a resilient economy with the potential for rate cuts ahead. And even so, "it is important to recognize that investing involves periods of changing market sentiment and fluctuations in the economic landscape," he writes. And as investors were reminded of this spring, "periodic pullbacks -- such as corrections of 10% or more -- are a normal part of the cycle and occur somewhat regularly."

It may be easy to feel bold at the moment, but if there is more near-term volatility, moving out of some winners toward more defensive areas of the market in the name of diversification. After all, as Rehling notes, it's better to reassess from a position of strength than fear: "A well-balanced portfolio suited to your particular situation is critical, and market highs are an ideal time to make any necessary adjustments."

Moreover, you don't have to believe that the bull market is vulnerable to admit that its pace could slow. Although some strategists see a third straight year of 20%-plus gains for the S&P 500 in 2025, that would be the first time it has been able to deliver that level of growth in roughly three decades. And after such a strong performance in the first half, maybe landing somewhere in the middle in the back half of the year seems plausible, as TS Lombard argued earlier this month.

Ned Davis Chief U.S. Strategist Ed Clissold makes a similar point, as his "base case is that the economy muddles through, generating enough activity to avoid recession but far from strong enough to force the Fed to raise rates." He believes investors should still be modestly overweight stocks, and see dips as a normal part of an ongoing bull market, and even so he notes that near-term bumps could be on the horizon: "Stocks are overbought and sentiment is optimistic heading into a seasonally weak time of the year."

In short, the living isn't always easy in summertime: August 2024 was one of the most volatile months for stocks in years, with big tech notching major losses to start the month. And it was just a few days before the end of July 2022 when Walmart slashed guidance in what would become a common trend for retailers left holding too much inventory as inflation began to bite, presaging that fall's selloff.

Investors could do worse than taking some profits to fund a day at the beach.

Write to Teresa Rivas at teresa.rivas@barrons.com

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July 31, 2025 14:29 ET (18:29 GMT)

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