Experts Issue Startling Warning: S&P 500 Set to Plummet by 30% or More

2023-08-31 14:40:26

Stock Market Experts Predict S&P 500 Plunge of 30% or More

Renowned investors Bill and Cole Smead are warning stock-market investors about an impending downturn. Comparing the current market conditions to the dot-com bubble in 2000, Cole Smead predicts that the S&P 500 will lose at least 30% of its value in the years to come.

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In a letter to investors, Bill Smead emphasized the exorbitant valuations of stocks, describing the present financial euphoria as surpassing even the dot-com bubble. Smead, who co-manages the successful Smead Value Fund (SMVLX), pointed out that the fund has outperformed 99% of similar funds over the past five years and 98% over the past 10- and 15-year periods, delivering a remarkable return of 121% since March 2020, while the S&P 500 only posted 91.6%.

The concentration of stocks in the tech sector plays a significant role in Smead's prediction. So far this year, only seven tech stocks have accounted for a majority of the S&P 500's impressive gains. While the index is up 15.5% year-to-date, it reached as high as 20% at the end of July.

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Concentration of Tech Stocks

One way to illustrate this concentration is by comparing the performance of the tech-heavy Nasdaq 100 index to that of the small-cap Russell 2000 index. Currently, the ratio between the Nasdaq 100 and Russell 2000 stands at 8.04, whereas during the dot-com bubble, it reached 8.16. This ratio, which indicates the disparity in performance between large-cap and small-cap stocks, has risen to seven again in 2020, 2021, and 2023.

Another perspective on the concentration of tech stocks is their share of the S&P 500's market value. Whereas during the dot-com bubble, this share exceeded 34%, it currently stands at 28%. However, if companies like Amazon, Tesla, Netflix, Alphabet, Meta, Visa, Mastercard, Paypal, and Fiserv – previously considered tech companies – are included, the tech sector's market value exceeds 41%, according to Smead Capital Management.

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Investor Psychology and Concerns

Another aspect contributing to the Smeads' concerns is investor psychology. The percentage of household assets held in equities, known as household equity ownership, currently exceeds 35%, similar to levels seen during the dot-com bubble. This indicator has a strong historical correlation coefficient of 0.82 with annualized stock market returns over the following 10 years. When household equity ownership goes above 35%, annualized returns tend to be low, often approaching 0%.

While this does not imply that the S&P 500 will consistently deliver low returns until 2033, it suggests a higher likelihood of a significant sell-off in the coming years. "Manias die in vicious ways," remarked Bill Smead.

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Cole Smead further emphasized the negative investor psychology, describing people as complacent and disillusioned with stocks. He believes the S&P 500 could plummet by 30% or more, leading to years of disappointment for investors.

Critics and the Possibility of an Economic Downturn

While some argue that the stock market rally could continue due to hype around artificial intelligence and optimism regarding the US economy's strength, others are less optimistic. The S&P 500 has already experienced a 4% decline this month in response to rising interest rates and concerns about further Federal Reserve hawkishness.

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JPMorgan's top global stock strategist, Dubravko Lakos, predicts a recession ahead due to inflation persistently exceeding the Fed's target of 2% and rates remaining high. Leading macro indicators, such as the Treasury yield curve and The Conference Board's Leading Economic Index, also indicate an approaching recession.

While some argue that the current situation is different, citing consumer spending facilitated by pandemic stimulus and moderating inflation, the long-term effects of high interest rates on the economy remain uncertain.

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