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According to Michael Grant of Calamos Investments, the bull market could be in its final days.
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The CIO said the market is suffering from the “invincibility syndrome.”
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Grant said stocks could soon enter a period of weak returns, possibly for “many years.”
The bull market in equities appears to be close to the top, according to an investment chief.
Michael Grant, the co-CIO of Calamos Investments, thinks large-cap stocks could be on track for one of the best years of the past century before the market enters a period characterized by sub-par returns.
That’s because stocks are showing signs of “invincibility syndrome,” where investors wrongly believe that nothing can stop further gains, he said in a note this week.
“The defining characteristic of this investing year is the perception that U.S. stocks are virtually invincible. This ‘invincibility syndrome’ historically signals a crescendo when markets are in the process of reaching a major peak,” Grant wrote.
“We believe the paradox of this rewarding year is the underlying warning of low future returns for 2025 and beyond,” he added later.
The precarious state of the market can be gauged from a range of data points measuring valuation, sentiment and positioning, he noted.
A handful of valuation metrics suggest stocks are at historically expensive levels, Grant said. For example, the average price-to-earnings ratio of the S&P 500 is 28; the most expensive stocks relative to earnings have been since the dot-com bubble.
Meanwhile, Shiller’s standard cyclically adjusted price-to-earnings ratio – which smooths out price-to-earnings ratio outliers – has risen above 35, its highest level ever.
Sentiment and position indicators are also signals that investors are overenthusiastic about the stock market, Grant said.
Households appear to be the most optimistic about stocks since the dot-com era. The percentage of consumers expecting stock price increases in the coming year has risen to the highest level since 1987, according to the quarterly moving average of responses to the Conference Board’s monthly survey.
Households also have a lot of money that is spent on investments. U.S. households held a record $42.43 trillion in company stocks and mutual funds in the second quarter, Federal Reserve data show.
Meanwhile, the amount of cash held by non-bank investors as a percentage of stock funds has fallen to almost 30%, near an all-time low. That suggests there is little “cushion” in case the stock market falls or experiences a shock, Grant said.
“What stands out today is how positioning metrics confirm the diagnosis of extended confidence and appreciation for the leading US stock categories. What is left to drive a market higher when everyone is already bullish?” Grant said.
Investors are quite bullish on stocks so far this year, largely due to optimism about the US economy and expected interest rate cuts. But if the economy is headed for a soft landing or no landing at all, that suggests interest rates won’t move significantly lower, Grant said.
“Simply put, the decline in long-term risk-free returns appears complete unless the soft landing assumption is completely wrong. The landscape taking shape represents the final phase of the bull market and a prelude to a much more disrupted period ahead. maybe for many years,” he said.
Grant added that the rise to 6,000 for the S&P 500 suggests that 2024 will be the strongest year for large-cap stocks of the century yet, but that doesn’t mean the future will look so bright.
“And yet this thought pales in comparison to the growing evidence that we are witnessing a crescendo: a top for stocks that could prove sustainable.”
Read the original article on Business Insider
