What Could Cause a Bear Market Now?

Since the tariff induced correction of March 2025 life has been pretty easy for the bulls.

Sure we had a minor setback this year in March because of the start of the war with Iran, but with most people assuming that will not last much longer, the bulls have been charging ahead once again.

So today I figured I would discuss the potential bear case. Not that I am bearish...but always wise to consider all possibilities so you invest with your eyes wide open and able to adjust if things move the opposite of what you expect.

Market Commentary

In the last Zen Investor webinar on May 20th, I talked about how high the S&P 500 could go this year. With that I shared the wide range of opinions from Wall Street experts ranging from 7,100 to 8,200. And then I outlined why I think 7,800 seems about right.

Just 2 weeks later we are making new highs once again around 7,600 and just think that 8,000 is a more logical end point for the year. Not that my previous argument was faulty. The reality is that we are only talking about pushing 2.5% higher to a level that is more “psychologically pleasing”.

Meaning that once we get up around 7,800 then 8,000 will have some serious magnetic pull. So that is just a modest shift in the upside picture.

However, the point of the commentary today is to contemplate what could go wrong leading to a bearish outcome. On that front, there are really only 2 natural causes of bear markets to contemplate; Recession & Valuation Bubbles.

Let’s review the potential for each.

What Could Cause a Recession?

Recessions come around on average every 5-6 years. Not a rubber stamp as they vary greatly in longevity. Just a statement that it is not uncommon.

It is easy to say that the cause of recession is economic decline + job loss. But what would lead to that outcome???

Historically a prime cause of recessions is emerging from a period of extended inflation. That’s because the more people fear inflation...the more they make purchases now because of concern of a much higher price down the road.

This at first creates a surge in economic activity as purchases are pulled forward and that creates a cliff leading to a period of lower economic activity. This is why so many people expected a recession in 2022 as inflation spiked.

We got the economic contraction in the first 2 quarters of the year...but since job loss did not unfold, then it was not officially a recession. Yet still it did create a shallow bear market with S&P 500 declining 27% (whereas the average bear market sees a 34% sell off).

We all know inflationary pressures have re-emerged thanks to the war with Iran and what that means for energy prices. The wide spread assumption is that a peace deal will be reached in the near future.

BUT WHAT IF THAT DOESN’T HAPPEN???

Iran is not going quietly into that good night. They know they have the US by the short hairs and stretching out the negotiations.

So the longer it goes on...the higher the inflationary pressure...the higher the odds a recession is on the other side of that vicious cycle...and yes the more likely a bear market unfolds.

Long story short, the longer it takes for a peace deal...the more we have to consider this negative outcome and what that means for our investment strategy.

For clarity, there is no reason to panic now. Just don’t think logical for overall market to press much higher without the peace deal in hand.

So range bound seems most appropriate and then start contemplating downside potential if it takes more than 2-3 months to come together.   

What Could Cause a Valuation Bubble?

Let’s be clear that recessions are the much, much, much more common cause of bear markets. In our lifetime we only really dealt with one bear market caused by a stock valuation bubble which was the dot.com bubble of the late 1990’s that took 3 years to wring out the excesses. The previous one was 1929.  

However, there has been a clamor that AI could inflate to bubble proportions. Gladly a lot of those stocks lost their luster over the past several months all the while their earnings prospects brightened. The sum total points to more reasonable valuations for the group which shows up in the forward PE chart by market cap below:

Last year I shared this chart MANY times as the Mega Cap (Mag 7) forward PE above 30 was becoming bothersome. Gladly that is a bit more palatable now. Same goes for the froth that was showing up in large cap stocks.

Right now, we are pretty far away from bubble territory. Yet history does have a way of repeating itself. So, if AI stocks start climbing again...and then it appears to be an easy button for investing...then you could see the conditions for a more bothersome bubble to form.

Again, during the bubble investors are having a great time. It’s the hang over after the party ends that is the problem.

At this stage we are not in a bubble...but are aware that conditions are there to create one in the AI space. So for now this is an unlikely cause of any looming stock market decline.

Putting it altogether, the bull case far outweighs these 2 bearish possibilities. The one I would be most watchful of is the Iran situation and what that means for energy prices.

Again, the longer that goes on...the higher the possibility of recession...and we will be faced with another pullback or correction like March of this year awaiting the outcome.

Until then we remain bullish looking for a mix of stocks that score highly on the Zen Ratings. Meaning where they combine financial strength with consistent growth and trading for a reasonable valuation.

As I have said MANY times before that mix is always a good idea when it comes to stock investing. And it certainly has paid off for us as proven by the Zen Investors portfolio gain of +30.45% portfolio so far this year.

What To Do Next?

Discover my Zen Investor portfolio that relies upon my 45 years of investing experience. 

During that time I have learned vital lessons from 7 bear markets…8 bull markets and just about everything else the “Mr. Market” can throw at us. 

I use this knowledge to create a detailed investment plan. Then lean into our proven Zen Ratings quant model to select the best stocks given their proven outperformance. 

In total the Zen Investor portfolio now has 20 top stocks that are hand picked for today’s unique market landscape. 

And as shared above it is doing very well in 2026 as our portfolio is up +30.45% YTD far surpassing the benchmarks.  

Plus 5 new stocks were added this week that both have stellar upside potential. 

If you are curious to learn more, and want to see my current top 20 stocks, then please click the link below to get started now. 

Discover the Zen Investor & Top 20 Stocks >

Wishing you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)

Editor of the Zen Investor

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