Stimulated by the AI boom, the US stock market has recently hit new highs. However, Jeremy Grantham, the founder of GMO and known as the “value investing guru,” has recently warned that the US stock market is severely overvalued, and a US economic recession is imminent. He believes that the AI bubble is destined to burst, and also claims that Bitcoin is a scam.
Benefiting from the AI frenzy, the US stock market has been continuously rising in 2023, with the S&P 500 Index surging more than 20% in the past year. The tech-heavy Nasdaq Index has even risen more than 30%. However, in an interview with ThinkAdvisor, Grantham warned that it is best to stay away from the US stock market, as the prices are outrageously high compared to other countries around the world.
Grantham asserts that the US stock market will experience a difficult year, and points out that the profit margins of US companies are at historical highs relative to their foreign competitors. This creates a “double danger” situation for the stock market, as both earnings and price-to-earnings ratios could decline.
Grantham, famous for accurately predicting the Japanese asset bubble in the late 1980s, the dot-com bubble in 2000, and the 2008 financial crisis, had previously warned in early 2022 about the emergence of a super bubble, which resulted in a 19% drop in the S&P 500 Index and a 33% drop in the Nasdaq Composite Index that year.
Grantham states that the US stock market was expected to further decline by 20% or 30%, but the AI frenzy at the beginning of 2023 “violently interrupted” the market sell-off and changed the entire market’s escape route.
In Grantham’s view, Bitcoin is essentially a scam, while AI is not. However, he predicts that the “incredible frenzy” surrounding AI will not last long. Nevertheless, in the next few decades, AI may prove to be as revolutionary as the internet.
Warning of a mild economic recession in the US
On the other hand, despite a robust 3.3% growth in GDP in the fourth quarter of 2023, with unemployment and inflation rates below 4% in December, and the Federal Reserve expected to lower interest rates multiple times this year, Grantham remains pessimistic about the US economic outlook. He points out the inverted yield curve and ongoing decline in leading economic indicators as signs of trouble ahead.
In terms of geopolitical risks, Grantham highlights the threats posed by the Russia-Ukraine war and conflicts in the Middle East, stating that wars can give rise to a hellish geopolitical backdrop. With assets at record highs, this backdrop is particularly concerning.
Grantham advises investors to remain cautious and suggests looking for undervalued assets in emerging markets like Japan, struggling industries such as natural resources, and growth areas like climate change solutions.
It is worth noting that Grantham’s predictions in recent years have not been very accurate. He predicted in April of last year that the S&P 500 Index could plummet by half to around 2,000 points in the worst-case scenario. However, since then, the S&P 500 Index has soared to a historic high of over 4,900 points.