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Legendary investor Jeremy Grantham is back with a fresh warning of a market bubble, which he's calling the "biggest one in American history." Leading the charge into recent unprecedented levels are the "artificial intelligence high flyers," with a 70% decline in prices not to be ruled out. Grantham says it's different this time around, compared with prior bubbles like railroads and the internet, where everyone could see their clear utility and impacts.

Quote: "The indicators of crazy euphoria, like SpaceX (SPCX), are all over the place. SpaceX defines its addressable market as a quarter of the global GDP," he declared on Steven Bartlett's podcast, The Diary Of A CEO. "It's a fabulous B.S. story: mining asteroids and the huge incredible success of AI. It's the classic description of a market peak. It's what you look for at the top of a terrific bubble."

What will it mean for the economy: "The high flyers [companies] will lay people off, and a lot of people will feel less rich. People who feel poorer will spend a little less, so the economy tends to be under some stress. If you look at the great bubbles breaking of the past, you find that it's followed by really tough times."

How should the average person invest? "Rule No. 1 is to be diversified. Hold a broad-based index of non-U.S. equities for 60% of your money. They're much cheaper, and since the beginning of last year, they have handsomely outperformed. [Another] 5%-10% in precious metals like gold and silver. If it's convenient and sensible, hold a bit of real estate, but it's pretty darn expensive by historical standards. The rest, I'd put in bonds."

https://seekingalpha.com/news/4607660-sounding-the...

and a lot of people will feel less rich.
...
Hold a broad-based index of non-U.S. equities...

On the subject of the relationship between those shamelessly context free snippets:

One thing that is quite interesting about current conditions compared to previous cycles is the extent to which ex-US investors are "all in" on US equities. 70% of all money raised by the global asset management industries has been going into the US. We (the "foreigners") collectively own about $22tn worth of US shares, triple the level a decade ago. This time around, should there be a market "accident" in the US, it will smack people (and retirement funds, and governments) worldwide very much more than in past episodes.

I don't know where the top will be, but there have been many interesting developments in markets lately. It seems that, rather than narrowing as it typical at a market top, the fun has been spreading in places. The latest 20% pop in essentially all big Nasdaq stocks in the last 3 months is quite remarkable. The equal-weight S&P hit an all time high on Thursday, and the equal weight Nasdaq 100 hit a new all time high Tuesday last week, both much more recently than their kinda-cap-weight equivalents. So, though I don't know what will happen, what seems most likely is that the party will not end very soon, but when it ends it will be one for the ages.

Jim
(still about 2/3 cash, though some of that is backing some derivatives)

though I don't know what will happen, what seems most likely is that the party will not end very soon..

PS
It is fun to watch, though.

From this week's Factset report:
Earnings: S&P 500 Expected to Report Earnings Growth of 24% for CY 2026
...
Targets & Ratings: Analysts Project 21% Increase in Price Over Next 12 Months


Nope, no exuberance here!

Jim

I'd wager a small amount that to-the-degree extremes up in earnings will be met with similar down ones. Market likewise.

One of the issues that's going to confuse people yet again with things powerfully cyclical is that when the growth is extreme and the PE's are single digit, even 5 and below, that's when the stocks will be most over-valued.

I'd wager a small amount that to-the-degree extremes up in earnings will be met with similar down ones.


Maybe, maybe not.
I know of a guy who refused to buy GOOG at 100.
Another guy who refused to buy AAPL until it came back down to 100.

That was before 40-1 splits in GOOG and 28-1 in AAPL.
That's split-adjusted 2.50 for GOOG and 5.00 for AAPL.


One of the issues that's going to confuse people yet again with things powerfully cyclical is that when the growth is extreme and the PE's are single digit, even 5 and below, that's when the stocks will be most over-valued.

The Historical average of the S&P500 is 16.2.
Currently SPY P/E is 26.1

MU P/E is 25.6. Whew!

I'd wager a small amount that to-the-degree extremes up in earnings will be met with similar down ones.
...
Maybe, maybe not. I know of a guy who refused to buy GOOG at 100.
Another guy who refused to buy AAPL until it came back down to 100.
That was before 40-1 splits in GOOG and 28-1 in AAPL.
That's split-adjusted 2.50 for GOOG and 5.00 for AAPL.


Though I don't have a dog in that race, I might add by the same reasoning that I know a guy who absolutely refused to buy the winning numbers 09 20 28 29 36 42 in last week's Ontario lottery. What a fool!

The moral being, Apple and Google aren't really examples of anything in terms of the advisability of buying at high valuations in the past, because you also have to consider what the odds are of winning when you buy at high valuations *without* knowing the future of the specific security in question. It's really easy to say with hindsight that they were obvious winners, but that can't be believed without a time machine and going back to see what all the OTHER obvious winners were.

More broadly, buying any given single stock at high valuations will give an incredibly wide range of outcomes (with a low average). But buying a broad market at extremely high valuations will pretty predictably give poor returns over a medium-to-long horizon.

The one thing that we can say for sure is that the broad US market, based on smoothed real earnings, is more expensive than it has been 95% of the time since 1995. It might go up a lot from here, who knows? But the omens are not very good. Starting on days when the valuation was in the highest 10% of weeks since 1995 (half of them pricier and half cheaper than now), forward returns were reliably poor. Looking forward 7 years with smoothing (to average end level 4-10 years later, annualized as a seven year rate), the average forward real total return was -2.6%/year for 7 years. The lowest figure was -4.1%/year, the highest -0.3%/year. I have no idea whether it's a good idea or not to buy any given firm at a P/E of 30. Usually not, but sometimes yes. But to buy the broad market at a P/E of 30 would be a poor allocation of capital.

I think one could make the very brave prediction that an S&P 500 index tracker fund will be 25% lower than today at some point in the next 10 years, after counting dividends and inflation. In case any future historian wants to find out whether that was so, CPI is at 335.123 and SPY closed at $728.99. So the thesis is that one would be better off holding TIPS till then. Five year TIPS current yield is inflation + 1.915%.

(weirdly, that TIPS yield is up hugely in the last 2 months, up from 1.15% around mid Feb-mid Mar. Since the expectation of inflation risk is rising, I'd have thought that buying TIPS because they offer protection would have driven the yield down, but the TIPS market is notoriously disconnected from economic expectations--it has been "risk on" all the way baby)

Jim

Jim

It looks like you have about 1,100 weeks of data (Jan 1995 until Dec, 2015). If not too big of an ask, could you show the other deciles? The first half of the sample (1995 plus 4 to 10 years until 2005 plus 4 to 10 years) includes the Dotcom bust and the GFC, so a pretty tough period.

Aussi

Grantham has predicted 11 of the last three recessions. He's very smart, his ideas are well reasoned and very convincing, but his returns have been bad.

Grantham has predicted 11 of the last three recessions. He's very smart, his ideas are well reasoned and very convincing, but his returns have been bad.

This is also my impression. Why is he called a "legendary investor"? Not snark, really asking.

Baltassar

It looks like you have about 1,100 weeks of data (Jan 1995 until Dec, 2015). If not too big of an ask, could you show the other deciles? The first half of the sample (1995 plus 4 to 10 years until 2005 plus 4 to 10 years) includes the Dotcom bust and the GFC, so a pretty tough period.

Actually I have about 6600 weeks, but I figured it's of limited relevance to modern markets. Everything averaged much cheaper back in the day.

For this table I didn't use deciles, since all the interesting stuff happens near the extremes.
Possible summary: really high valuations are a poor bet, but only REALLY high ones. Moderately expensive valuations lead to a wide variety of outcomes. Cheap valuations do very well quite reliably, even "pretty cheap" ones (and also, not visible in this table, cheap valuations tend to pay off pretty quickly).

All figures include reinvested dividends and are adjusted for inflation.

                                 Lowest    Pctl 10    Average    Pctl 90    Highest
Most expensive     1% of time     -4.1%      -3.9%      -3.5%      -3.0%      -2.9%
next               3% of time     -3.9%      -3.7%      -3.1%      -2.4%      -2.2%
next               6% of time     -3.4%      -3.1%      -2.1%      -1.2%      -0.3%
next               8% of time     -2.4%      -1.8%       0.1%       2.1%       2.3%
next              16% of time     -0.5%       0.3%       3.0%       7.4%       8.7%
next              16% of time      1.4%       2.0%       5.5%       9.3%       9.8%
next              16% of time      2.0%       2.7%       7.4%      10.5%      11.2%
next              16% of time      3.5%       4.2%       9.4%      12.5%      12.9%
next               8% of time      5.3%       8.6%      11.9%      13.4%      14.0%
next               6% of time     10.6%      11.8%      12.7%      13.8%      14.6%
next               3% of time     12.7%      13.3%      14.0%      14.5%      14.7%
Cheapest           1% of time     14.9%      14.9%      15.7%      16.6%      16.9%

And I should add that the prior comment about poor past returns starting at valuation levels similar to the current levels since 1995 is more than a bit misleading, since there were few such times. Most of those starting weeks were during or near the dotcom bubble, or were so recent that there aren't 4-10 year forward results in yet, so it's really a sample of one bubble if you squint.

The valuation method used to divide up the weeks is very similar to CAPE, just that the smoothing is a bit smoother than the 10 year average traditionally used.

Jim

Why is Grantham called a "legendary investor?...

Grantham is highly respected for predicting both the 2000 dot-com collapse and the 2008 financial crisis.

Grantham famously anchors his investment thesis in a statistical framework.
He argues that all massive economic bubbles eventually fall back toward their historical trend, much like a rubber band stretching. (The Principle of Mean Reversion)

Grantham's two-sigma bubble framework shows all 26 prior historical bubbles reversed to trend without exception, pointing to a potential 70% peak-to-trough collapse.

He also highlights the market capitalization-to-GDP ratio ("The Buffett Indicator"), which sits at about 235%.
During the dot-com bubble peak in 1999, this same ratio approached 200%, a level Buffett said meant you were "playing with fire."

He argues that transformative ideas always attract too much money, creating bubbles that inevitably burst.
He pointed to SpaceX's blockbuster valuation as a symptom of this peak euphoria.
These factors have caused Mr. Grantham to currently conclude:
"The long-run prospects for the broad U.S. stock market here look as poor as almost any other time in history."

Maybe it is different this time, maybe we've reached a "permanently high plateau."
Maybe the market will never again return to trend, maybe Grantham is totally wrong.
Or maybe not...
Stay tuned!

"You never know who's swimming naked until the tide goes out." ~Warren Buffett

https://finance.yahoo.com/markets/stocks/articles/...

https://seekingalpha.com/news/4607793-this-is-the-...

https://www.cnbc.com/2026/06/26/jeremy-grantham-sa...

These factors have caused Mr. Grantham to currently conclude:
"The long-run prospects for the broad U.S. stock market here look as poor as almost any other time in history."

Okay. So what's the alternative? Or is it just a generic grousing?



As a wise man once said, in response to a complaint "I wish it was not happening."

Wise man replied, "So do I, and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us."

consider that

a. grantham is not going promise something will be 100% immune from a crash. that's would be foolish and never done in his correct calls either.

b. GMO is running real billions.
they obviously HAVE to do something with skin in the game, and not just grouse.
a little effort will give one an idea what they are doing, but it not easily inform how to specifically tweak your own portfolio.
(given tax drag, inflation protection, timing, etc...)

GMO is running real billions.
...
a little effort will give one an idea what they are doing

I'm your man when it comes to little effort.
From a Google query:

"His Overall Investment Playbook

Emphasize Value & Non-U.S. Equities: He generally recommends avoiding U.S. growth stocks and index funds, instead focusing on heavily discounted international stocks (such as Emerging Markets and Japanese equities).

Quality & Commodities: He favors high-quality stocks with low debt and robust profit margins, as well as heavily depressed natural resource sectors.

Defensive Allocations: He recommends increasing cash reserves for liquidity and allocating to precious metals, while notably avoiding cryptocurrencies like Bitcoin."

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