Stocks are ridiculously overpriced and likely to struggle, artificial intelligence is a bubble waiting to explode, and the economy will suffer a small recession or worse, according to Jeremy Grantham.
In a recent ThinkAdvisor interview, GMO’s co-founder and long-term strategist advised investors to avoid US equities. “They’re almost ridiculously higher priced than the rest of the world,” he went on to say.
“The stock market will have a tough year,” he added. American firms’ profit margins are at record highs in comparison to overseas competitors, producing a “double jeopardy” situation for equities in which both profits and multiples may decline, he warned.
Grantham, a market historian who warned of a multi-asset “superbubble” at the start of 2022, said it broke that year when the S&P 500 fell 19% and the tech-heavy Nasdaq Composite fell 33%.
Stocks would have fallen another 20% or 30%, he said, but the sell-off was “rudely interrupted” by an AI frenzy in early 2023, which “changed the flight path of the entire stock market.”
The senior investor stated that “AI isn’t a hoax, as bitcoin basically is,” but predicted that the “incredible euphoria” around it will pass. Still, he predicted that it may be as transformational as the internet in the coming decades.
Grantham also offered a pessimistic outlook for the US economy, despite robust GDP growth of 3.3% in the fourth quarter, unemployment and annualised inflation below 4% in December, and the possibility of further interest rate decreases this year. On the other hand, the inverted yield curve and persistent drops in major economic indices indicate problems coming.
“The economy will weaken,” he predicted. “We’ll have, at least, a mild recession.”
Grantham also highlighted the threat posed by conflicts in Ukraine and the Middle East, saying that wars may create a geopolitical environment that is “scary as hell and in which bad things can happen.” The situation is especially concerning when assets are at historic highs, he noted.
Aside from bubbles, I specialise in long-term, undervalued negatives,” Grantham explained. “And my God, there’s a rich collection of negatives right now.”
The bubble expert advised investors to exercise caution and seek for inexpensive assets in rising economies like as Japan, depressed industries such as natural resources, and growth areas such as climate-change mitigation.
It is worth noting that Grantham’s pessimistic expectations have failed to materialise in recent years. For example, he predicted in April that the S&P 500 might be slashed in half to approximately 2,000 points in a worst-case scenario, but the benchmark stock index has risen to an all-time high of more than 4,900 points since.