Howard Marks, one of the most respected value investors who famously predicted the dot-com bubble, points out several red flags in the market, including valuations, which lead to poor returns over the long term. , or it could mean a significant decline in the short term. The co-founder and co-chairman of Oaktree Capital Management said in a recent note to clients that the stock market is looking at the S&P 500 index, which hit its highest two-year high since 1998. We’ve listed five warning signs. Marks revealed: Although he doesn’t necessarily call for stock bubbles, as he specializes in credit these days, the memo focuses on signs of stock market frothiness. “It is not surprising that investment returns are highly dependent on the price paid for that investment, so investors should clearly not be indifferent to today’s market valuations,” Marks wrote. . Marks’ memo pegs the S&P 500’s current price-to-earnings ratio as 22. Using data from JPMorgan Asset Management, Marks explained that historically higher P/E ratios have led to lower returns over the long term. The data showed that the current multiple of 22 is near the high end of the range, and the 10-year return at this level would be between +2% and -2%. Rather than underperforming over the long term, Marks said, the correction in multiples could be compressed into a short period of time, causing a sharp, sudden drop similar to when the internet bubble burst in the early 2000s. He pointed out that there is. .SPX 1Y Mountain S&P 500 Apart from valuations, Marks specifically took issue with the “enthusiasm being poured into this new thing called AI.” Artificial intelligence has emerged as the biggest investment theme over the past two years, driving major beneficiaries like Nvidia to incredible prices. This enthusiasm for AI may have spread to other high-tech fields, Marks added. However, he said he was concerned about the “tacit assumption” that the seven largest companies are too big to fail. The so-called Magnificent Seven stocks — a group that includes high-flyers like NVIDIA, Microsoft, Apple and Metaplatform — accounted for more than half of the S&P 500’s gains in 2024, according to Bespoke Investment Group. Many still see more profits coming for these giants. Marks, who had $205 billion in assets under management as of September, also raised questions about whether some of the S&P 500’s rise was due to automatic buying by passive investors who don’t consider value factors. The 78-year-old investor began writing investment memos in 1990 that have become required reading on Wall Street. Even Warren Buffett says he reads books regularly and always learns something from them. Marks said he has been thinking a lot lately about a quote often attributed to Buffett: “When investors forget that corporate profits grow at about 7% a year, they tend to suffer.” But when Marks asked his friend Buffett about that statement, the legendary investor said he had never said that. “But I think it’s great, so I’ll keep using it,” Marks wrote.
