Experts reveal the eight signs a stock market crash is about to start – and what you must do NOW to protect yourself

A stock market crash is on the way – growing numbers of experts are agreed on that. What they don’t know is when it will hit, as there is plenty going on in the world that has the potential to trigger havoc on the markets.

Concerns about the Trump administration and US government shutdown are causing jitters, and closer to home there are worries about this month’s Budget.

Tensions persist in the Middle East, stock markets – and AI company shares in particular – are hitting record highs, and a potential French government failure is in the offing.

Meanwhile, investors are still grappling with sticky inflation, interest rate uncertainty and gloomy economic forecasts.

Timing the market is nigh on impossible, but there are warning signals that experts keep an eye on which could indicate the start of a market meltdown. While no single indicator is enough to sound the alarm for a sell-off, together they can help build a picture of the state of the market.

The yield curve

THIS refers to the shape of the line on a chart showing the rate of interest paid (y axis) on a bond versus the time until the bond matures (x axis). Typically, the longer you are willing to hold a bond, the more you get paid.

That is because it is usually riskier to hold a bond for longer because you don’t know what will happen in the meantime that could make your yield seem less attractive.

For example, if you take out a ten-year bond that pays 4.4 per cent, and then interest rates soar, the value of the fixed income you are receiving becomes less valuable because you would be able to get a better rate elsewhere.

In normal times the yield should be lower for short duration bonds, and rise for longer-term ones.

The line on a graph demonstrating this relationship should go diagonally upwards from left to right.

When the yield curve inverts, investors are paid more for holding short-term bonds and the usual line on the graph flips so that it starts higher and falls as it moves from left to right. This phenomenon is generally considered a reliable indicator of a recession as it shows that markets expect central banks to cut interest rates – something they usually do to stimulate economic growth in a downturn.

Every time over the past 50 years that 30-year US bonds have paid 1 percentage point more than five-year bonds, a recession has followed, explains David Roberts, head of fixed income at Nedgroup Investments.

This has been the case for the past few months, he notes. But that does not mean there is cause for panic. The chance of a US recession in the immediate future still looks unlikely as the economy is proving robust, unemployment is very low and the US central bank, the Federal Reserve, is cutting interest rates.

Currently the UK yield curve is normal.

Two-year UK Government bonds – called gilts – pay 3.77 per cent, ten-year gilts 4.4 per cent, and 30-year gilts 5.17 per cent. But watch out if this changes.

Corinne Lord, investment specialist at wealth manager St James’s Place, says an inverted yield curve is not as failsafe an indicator as it used to be, but ‘it still provides a useful guide to investor expectations’.

Employment rates

When companies are struggling, they make redundancies. A rising unemployment rate is a common sign that a bubble has burst and a country is in recession.

‘When jobless claims start rising, it often points to labour market stress and lower demand from consumers,’ says Roberts.

In September there were 1.69 million jobless benefits claimants in the UK, a rise of 25,800 from the month before.

However, the figures are harder to read than in past recessions, because the data has been skewed since the pandemic.

Today, the number of jobless benefits claimants is 73,300 lower than a year ago, but 500,000 higher than before Covid hit.

Lord says: ‘There is evidence of a stagnant jobs market in the UK and US. It warrants some caution.’

The ‘PMIs’

Purchasing Managers Indexes (PMIs) are monthly surveys of supply managers across different industries, which analyse new orders, inventories, production, deliveries and employment.

The data gives an insight into how an economy is growing.

The index ranges from between zero and 100, with above 50 suggesting that conditions are expanding – companies are growing and doing more business – while below 50 indicates that they are contracting.

‘PMIs tell us whether demand is strengthening or fading,’ says Madhushree Agarwal, portfolio manager at Nedgroup Investments. ‘A drop in new orders alongside rising inventories can signal slowing growth.’

In the UK, the Composite PMI –the average score across manufacturing and services – dropped to 50.1 in September from 53.5 the month before.

Though falling fast, it has been much worse in the past. In April 2020, the arrival of Covid saw the UK’s Composite PMI go as low as 13.8 as the entire economy ground to a halt.

The current Manufacturing PMI dropped to a five-month low of 46.2 in September – a 12th consecutive month of contraction.

Businesses are struggling with rising costs, including the increases in National Insurance contributions for employers and the living wage, alongside higher interest rates and Budget uncertainty.

In the US, Composite PMI was 53.9 in September, down from 54.6 in August. Its Manufacturing PMI reached a three-year high of 53 in August before dropping one point to 52 in September.

Experts will be watching closely to see if these numbers fall significantly in the coming months.

Economic surprise index

This index, compiled by financial services firm Citigroup, shows the difference between economic forecasts and actual results, and includes factors such as retail sales, economic growth as measured by Gross Domestic Product (or GDP) and inflation.

It indicates whether economic performance is better or worse than expected.

Agarwal says: ‘Persistent negative surprise can indicate a shift in sentiment and the outlook for economic growth.’

Typically, the surprise index rises if an economy is growing or in recovery, and falls as it declines. A reading above zero is generally seen as good. Currently, the global index is at 8.2, up from -5.4 a year ago. The US index is at 13.8, having fallen as low as -26 in June.

Government deficits

The deficit represents how much a government’s spending exceeds what it is bringing in via tax receipts. It is different to the debt, which is how much a government owes overall.

The deficit can be problematic if it gets too big, as it is paid for by borrowing so the greater the deficit the more interest the Government must pay. If interest rates are high, it gets even more expensive to service the deficit.

Roberts says: ‘Most governments target a mild budget imbalance, but usually when that reaches 3 to 5 per cent of GDP, government spending starts to become constrained, causing an economic slowdown.’

In the year to April, the UK’s deficit was 5.3 per cent of GDP, says the Office for National Statistics. Worryingly, it has been rising, and the total deficit since then is £71.8 billion – 17.2 per cent higher than the same period a year ago.

This is causing anxiety ahead of the Budget, with many commentators speculating about how the Government can cut spending or raise its tax take to cut the deficit.

If the deficit continues to rise, it could spell bad news for the economy and further push up the cost of borrowing as investors get antsy.

Government debt cost

Pay attention to the Government’s ten-year gilt yield – this is debt issued by the UK Government to fund spending and indicates how much that debt costs to service.

Gilt yields dipped to 4.38 per cent last week, having reached 4.79 per cent in September.

The so-called ‘neutral rate’ that experts consider manageable is generally considered to be 3.25 to 3.75 per cent.

Watch out if yields start to rise quickly – the speed of the increase in yield is more of a danger sign than the yield itself.

For example, in September the 30-year gilt yield reached 5.7 per cent but caused no concern, while after the 2022 Liz Truss mini-Budget there was widespread panic when it reached 5 per cent.

Laith Khalaf, from investment platform AJ Bell, explains: ‘Between September 22 and 27, 2022, the 30-year gilt yield rose by 1.2 percentage points in three trading days.

‘By comparison, the 30-year gilt yield has risen by 1.2 percentage points over a year to reach its recent high of 5.7 per cent. This has allowed investors to absorb and adjust to the rise in yields.’

Company results

Earnings downgrades, missed forecasts and dividend cuts could all be cause for concern. Signs that firms’ health is less robust could be the precursor to a sell-off.

This could be a particular warning sign if it happens simultaneously across several companies in different sectors, says Chris Beauchamp, chief market analyst at online trading platform IG Group.

If analysts continue to downgrade expectations for companies’ results, it can make investors reassess the value of those firms.

Be wary of dividend cuts. While payouts to shareholders are never guaranteed, businesses don’t cut them without good reason.

‘When they do cut, it indicates falling cashflows and that firms are preserving money ahead of a potential downturn,’ says Beauchamp. ‘These typically begin before recessions become obvious.’

The Covid pandemic was an extreme example of widespread dividend cuts.

In 2020, at least 47 of the FTSE 100 firms reduced, suspended or cancelled their dividend, according to the investment platform Eqi, and more than 100 companies on the FTSE 250.

So far, however, payouts are looking relatively stable.

According to the latest Computershare dividend monitor, shareholder payouts totalled £24.6 billion in the third quarter of 2025, down just 1.4 per cent on the same period a year ago.

Investor sentiment

Investor behaviour is key to a bubble – and the bursting of it.

When investors are bullish – an investment term for feeling confident – they put more money into the market, which causes asset prices to rise. We get to bubble territory when prices start to lose touch with the reality of their actual value.

When investors become bearish – pessimistic – they pull money out of the market. If too many do this at once, it can spark panic, causing people to sell indiscriminately, which leads to a crash.

Mark Preskett, senior portfolio manager at Morningstar Wealth, says: ‘We are cautious on investor sentiment. Investors are clearly much more bullish than in the past and valuations appear frothy. This measure is flashing amber.’

But working out what will be the catalyst for a change in sentiment is difficult.

‘Bubbles can go on for longer than you think and then stop for no apparent reason,’ says Tom Stevenson, investment director at DIY investment platform Fidelity.

As an example, he cites the moment the dotcom bubble burst, saying: ‘It was not clear why prices stopped rising on New Year’s Eve 1999. Sometimes you just run out of buyers and then the reversal becomes self-feeding, as people panic and take profits.’

How can we measure sentiment? Pay attention to more speculative investments, says Stevenson.

This includes so-called meme stocks and assets such as cryptocurrency, both of which have been strong in recent months.

When investors start piling into speculative investments it can indicate that the market is too exuberant, and that people are buying without paying attention to the fundamentals of an investment, for example, a company’s business model or profits.

Look at metrics used to value companies, such as the P/E ratio, which shows how much investors are willing to pay for each pound of a company’s earnings.

Helen Jewell, chief investment officer at BlackRock Fundamental Equities, says of New York’s technology and growth stock exchange: ‘During the dotcom bubble, the P/E ratio of the Nasdaq got close to 300. Today, that number is around 35.’

There is no specific level of P/E ratio that is a red flag, but comparing it with the long-term average of that stock market or specific company can help to identify if a spike is coming, which could be cause for concern.

The Vix, or Volatility Index, measures how volatile markets are expected to be over the next 30 days. When the index goes above 25 to 30 it is often a precursor to a market dip, says Beauchamp.

Currently the Vix is at about 17. In April, the Vix closed above 50 after President Donald Trump first announced his trade tariffs, sending global stock markets into freefall.

How to protect yourself

• Ask yourself: if the markets fell by 5 per cent tomorrow, what would I do? ‘If that thought makes you feel ill, your portfolio is probably not appropriate,’ says Tom Stevenson, investment director at DIY investment platform Fidelity.

• Add more balance. Much of the bubble talk centres around the US and specifically technology and AI stocks, so ensure you have investments in other regions and sectors too. Equity Income funds can be a good choice, as these invest in quality, dividend-paying businesses that are often less affected by an economic downturn.

• A multi-asset fund that can invest in a mix of investments such as bonds, property and gold could help spread your risk. Money market funds, which invest in cash and cash-like holdings, can provide a safety net during times of turmoil.

• Investing should be a minimum of five years, as this timeframe allows you to ride out ups and downs on the market. Remember your long-term strategy and don’t be tempted to panic-sell if there is a dip – you will likely miss out when the market starts to recover.

• Have a cash buffer. Experts recommend having three to six months’ of outgoings in an easy-access account in case of an emergency – consider increasing this if you are worried.

Are you preparing your finances for a stock market downturn? money@mailonsunday.co.uk