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 investment guru,” recently warned that the US stock market is severely overvalued and the US economy is headed for a recession. He also believes that the AI bubble is destined to burst, and that Bitcoin is a scam.
Benefiting from the AI frenzy, the US stock market has been continuously rising in 2023. The S&P 500 Index has surged more than 20% in the past year, while the tech-heavy Nasdaq Index has 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 its prices have become outrageously high compared to other countries around the world.
Grantham asserts that the US stock market will face a difficult year and points out that US companies’ profit margins are at historical highs compared 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 is famous for accurately predicting the Japanese asset bubble in the late 1980s, the dot-com bubble in 2000, and the 2008 financial crisis. In early 2022, he warned of a super bubble in the market, resulting 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 would have experienced a further 20% to 30% decline, but the AI frenzy that started in early 2023 abruptly interrupted market sell-offs and changed the entire market’s exit route.
According to Grantham, Bitcoin is essentially a scam, while AI is not. However, he predicts that the “incredible frenzy” surrounding AI will not last long. Nevertheless, AI may prove to be as revolutionary as the internet in the next few decades.
Grantham warns of a mild recession in the US economy. Despite solid GDP growth of 3.3% in the fourth quarter of 2023, unemployment and inflation rates below 4% in December, and the Federal Reserve expected to cut interest rates multiple times this year, Grantham remains pessimistic about the US economic outlook. He points out the inverted yield curve and continuing decline in leading economic indicators as indicators of future troubles.
Regarding geopolitical risks, Grantham highlights the threats posed by the Russia-Ukraine war and conflicts in the Middle East. He suggests that war could give rise to a terrifying geopolitical backdrop, especially when assets are at record highs, which is particularly concerning.
Grantham advises investors to remain cautious and suggests seeking undervalued assets in emerging markets like Japan, depressed industries like 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. Last April, he predicted that in a worst-case scenario, the S&P 500 Index could plummet by half to around 2,000 points. However, since then, the S&P 500 Index has soared to a historic high of over 4,900 points.