Understanding the Market | Are US stock prices outrageously high? How much further will they fall?

Zhitong App learned that legendary investor Jeremy Grantham recently warned that US stock prices are outrageously high and may be in trouble. He also believes that artificial intelligence is a bubble destined to burst, and the US economy will experience a mild recession or even worse.

As the co-founder and long-term strategist of fund management company GMO, Grantham advises investors to stay away from US stocks. He said, "Their prices are almost outrageously higher than anywhere else in the world." He added that the stock market will have a difficult year, as US companies' profit margins are at historical highs compared to foreign competitors, which poses a "double danger" situation where both returns and price-to-earnings ratios may decline.

Grantham is known for predicting the economic recessions in 2000 and 2008. He warned of a "super bubble" in the market at the beginning of 2022, and that year the Pro UltrPro Shrt S&Pro 500 plummeted by 19%, while the tech-heavy Invesco QQQ Trust fell by 33%. He also predicted that US stocks may continue to decline in 2023, and the US economy is highly likely to enter a recession. However, this prediction did not come true.

Grantham explained that US stocks were supposed to fall another 20% or 30%, but the AI frenzy at the beginning of 2023 "rudely interrupted the selling and changed the trajectory of the entire stock market." He said, "AI is not a scam, while Bitcoin is basically a scam." He also predicted that the "incredible excitement" surrounding AI will not last, but AI may be as revolutionary as the internet in the next few decades.

In addition, despite the US GDP growth of 3.3% in the fourth quarter of 2023, with December unemployment and inflation rates below 4%, and the possibility of multiple interest rate cuts by the Federal Reserve this year, Grantham still made a pessimistic forecast for the US economy. The persistently inverted yield curve and the continuous decline of leading economic indicators indicate future troubles. He said, "The economy will become weaker. We will at least experience a mild recession."

Grantham also pointed out the threats posed by the Russia-Ukraine conflict and conflicts in the Middle East. He warned that the conflicts could foster a "terrifyingly hellish geopolitical backdrop where bad things happen." He added that this backdrop is particularly worrisome when asset prices are at record highs.

Grantham advises investors to proceed with caution and suggests that they look for undervalued assets in emerging markets like Japan, struggling industries like natural resources, and growth areas like climate change solutions.