Stocks have been on a tear but there are still bears sounding alarms of a bubble about to pop.
Bearish forecasters predict a crash as lofty valuations come back down to earth.
S ome big-name investors say stocks are flashing a number of warnings that a sharp pullback is near.
Stocks just keep climbing in 2024, but the bears haven’t been silenced and some are warning that the market is in a bubble on the verge of bursting.
Fears of a painful sell-off have been rising in recent weeks, particularly as stocks continue to break through to record highs. The S&P 500 and the Nasdaq hit four straight all-time closing highs this week, with tech titans like Apple and Nvidia continuing to soar past a $3 trillion market cap.
But the bears on Wall Street warn that the enthusiasm for artificial intelligence mirrors the internet bubble of the late 90s — and the recent run-up in stock prices is a bad omen for investors.
Here’s what five forecasters have to say about the latest rally — and why they think the stock market is headed for a fall.
Harry Dent
Stocks are in the midst of the “bubble of all bubbles,” and equities could lose more than half of their value as inflated asset prices finally burst, according to the economist Harry Dent.
When the bubble finally pops, the S&P 500 could drop as much as 86%, while the Nasdaq Composite could drop by around 92%, Dent predicted in a recent interview with Fox Business Network.
That bubble, which has formed over years of loose monetary and fiscal policy, is already showing signs of “topping,” Dent added. Stocks are “barely” making new highs, and equities have likely been inflated for the past 14 years, he estimated — far longer than most historical bubbles, which typically last for five to six years.
“It’s been stretched higher for longer, so you have to expect a bigger crash than we got in 2008 and 2009,” he warned.
Dent has been making the case for a major market crash for years. In 2009, he wrote a book predicting a stock market crash and ensuing economic depression, which he said could last for 10 years or more.
Capital Economics
Stocks have another 20% to inflate before the bubble bursts, according to Capital Economics.
The research firm is predicting the S&P 500 could see a steep correction following a rally to 6,500. That’s because there’s only so much more the market can gain before prices pull back, according to John Higgins, the firm’s chief market economist.
Stocks already look like they’re in a late-stage bubble, Higgins said, pointing to excessive hype surrounding artificial intelligence on Wall Street.
“Bubbles tend to inflate the most in their final stages as the excitement sort of reaches fever-pitch,” Higgins warned.
John Hussman
Elite investor John Hussman thinks stocks could plunge as much as 70% once the bubble bursts.
Hussman has been warning of a steep correction in stocks all year, and said in a recent note to clients that a handful of red flags are signaling pain ahead.
According to his firm’s most reliable valuation metric, the S&P 500 looks to be at its most overvalued since 1929, right before the stock market plunged and the US economy spiraled into an economic depression.
“I continue to view the market advance of recent months as an attempt to ‘grasp the suds of yesterday’s bubble’ rather than a new, durable bull market advance,” Hussman said in a recent note. “I also believe that the S&P 500 could lose something on the order of 50-70% over the completion of this cycle, simply to bring long-term expected returns to run-of-the-mill norms that investors associate with stocks.”
“Put simply, my impression is that the period since early 2022 comprises the extended peak of one of the three great speculative bubbles in US history,” he later added.
Richard Bernstein Advisors
According to RBA’s chief investment officer, Richard Bernstein, large-cap stocks are way overvalued and look positioned for a wipeout.
In a recent note, Bernstein noted that only a narrow group of stocks are propping up the market and that today’s mega-cap leaders are going to give back most of their gains and see dismal returns going forward.
At its worst, he predicted the most highly valued stocks could drop 50%, generating losses that rival the dot-com crash.
“That’s what I think we’re looking at,” Bernstein warned. “It’s multiple years of significant underperformance.”
Yet, that could end up being an excellent opportunity for investors who are diversified in other areas of the market, Bernstein said. He noted that his firm is bullish in practically every other area of the market except for the top seven mega-cap stocks.
UBS
The stock market is already flashing signs that it’s in a bubble, according to UBS.
Typically, there are eight warning signs of a market bubble forming, and six of them have already flashed, the bank said. Strategists pointed to signs like growing corporate profits pressure, falling market breadth, and aggressive stock buying among retail investors.
The good news is that the bubble may not immediately burst. Stocks are looking most similar to the bubble that occurred in 1997, rather than 1999, the analysts said.
“We only invest for the bubble thesis if we are in 1997 not 1999 (which we think we are),” strategists said in a recent note.
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