Howard Marks, one of the most respected value investors who famously foresaw the dot-com bubble, points to several warning signs in the market, such as valuations that could mean low returns over the long term or significant declines in the near future. In his latest note to clients, the co-founder and co-chairman of Oaktree Capital Management laid out five warning signs he’s seeing in the stock market following the S&P 500’s best two-year run since 1998. is sure to cause a bubble in stocks as his specialty is currently in credit, but the note focuses on signs of stock bubbles. “It should come as no surprise that the return on an investment depends largely on the price paid for it. For this reason, investors should clearly not be indifferent to today’s market valuations,” Marks writes. Marks’ note pegged the S&P 500’s current price-to-earnings ratio at 22. Using data from JPMorgan Asset Management, Marks explained that higher P/E ratios have historically led to lower returns over the long term. Today’s ratio of 22 is near the top end of the range, and that level would imply a 10-year return of between plus 2% and minus 2%, the data showed. Instead of performing poorly over the long term, the multiple correction is compressed into a short period of time, leading to sharp, sudden sell-offs much like when the Internet bubble burst in the early 2000s, Marks said. .SPX 1Y Mountain S&P 500 Beyond the valuation, Marks specifically took issue with the “enthusiasm that is being shown for new AI.” Artificial intelligence has become the biggest investment theme of the past two years, pushing key beneficiaries such as Nvidia to stunning prices. This enthusiasm for artificial intelligence could spread to other areas of high technology, Marks added. Meanwhile, he said he was also concerned about the “implicit assumption” that the seven largest companies would be too big to fail. The so-called Magnificent Seven stocks—a group that includes leaders such as Nvidia, Microsoft, Apple and Meta Platforms—have accounted for more than half of the S&P 500’s gains in 2024, according to Bespoke Investment Group. Many on Wall Street foresee even greater gains for these giants. Marks, whose firm managed $205 billion in assets as of September, also raised questions about whether some of the S&P 500’s gains were due to automatic buying by passive investors who don’t take value factors into account. The 78-year-old investor began writing investment notes in 1990, and they became required reading on Wall Street. Even Warren Buffett said that he reads them regularly and always learns something from them. Marks said he’s been thinking a lot lately about a quote often attributed to Buffett: “When investors forget that corporate earnings grow at about 7% a year, they tend to get into trouble.” But Marks said he asked his friend Buffett about the line, and the legendary investor said he never said it. “But I think it’s great, so I keep using it,” Marks wrote.
