There isn’t one strict way to define a stock market crash, but it happens when equities tank suddenly without warning. When living through them, it can feel like the world is ending. This feeling is exacerbated by investor panic or an economic shock.
The most recent started in February 2025, when President Donald Trump introduced sweeping tariffs on Chinese goods. Before that, the onset of the COVID-19 pandemic in February and March of 2020 rattled markets. They’re not common. But when they do take place, they surprise investors. And sentiment takes a massive hit.
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What happens to your portfolio during a stock market crash? Investors need to look at both the positive and negative aspects to be fully prepared if such a scenario arises.
Equity prices will fall
It’s no shock that during a crash, many of the stocks that you own will lose value. This could be a short-term phenomenon. However, it might also take a while for certain positions to fully recover.
Not all stocks will behave similarly. It all depends on the kinds of companies you have in your portfolio.
High-quality businesses should generally hold up better. Companies like this generate steady revenue that doesn’t fluctuate too much with broader macroeconomic trends, as customers should still need their products and services regardless of the backdrop. Their profits and free cash flows are robust. And their balance sheets are in solid shape.
This doesn’t mean that their share prices won’t fall. They could still drop with the overall market, or with the sector that’s getting hit hardest. However, these companies should still have relatively strong underlying fundamentals.
Unprofitable growth stocks are a different story. They typically need access to outside funding to keep operating. During a market or economic downturn, that funding can quickly dry up. As a result, these businesses face heightened uncertainty. And investors will become extremely pessimistic about their prospects.
These kinds of stocks are usually valued based on price-to-sales ratios. Shareholders should expect their valuation multiples to collapse.
You also have to think about market sentiment in this bleak environment. Negative headlines get all the attention. This can trigger a spiraling feedback loop. Falling stock prices can push even the most level-headed investors into a panic, leading to mistakes. And they might sell their stocks at the worst possible time in an effort to stop the pain, adding further downward pressure.
