Howard Marks, one of the most respected value investors, who famously foresaw the dot-com bubble, is pointing out a handful of red flags in the market such as valuation that could mean poor returns over the long term or a sizable decline nearer term.
In his latest memo to clients, the co-founder and co-chairman of Oaktree Capital Management laid out five cautionary signs he’s seeing in the stock market after the S&P 500′s best two-year run since 1998. Marks said he’s not necessarily calling a bubble in stocks since his specialty lies in credit these days, but the memo focuses on signs of froth in equities.
“It shouldn’t come as a surprise that the return on an investment is significantly a function of the price paid for it. For that reason, investors clearly shouldn’t be indifferent to today’s market valuation,” Marks wrote.
Marks’ memo pegs 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 in the long run. Today’s multiple of 22 is near the top of the range, and this level would translate into 10-year returns between plus 2% and minus 2%, the data showed.
Rather than poor performance in the long term, it’s also possible that the correction on the multiple is compressed into a short period of time, resulting in sharp, sudden sell-offs much like when the internet bubble burst in the early 2000s, Marks said.
Source: https://www.cnbc.com/2025/01/07/howard-marks-sees-cautionary-signs-of-bubble-says-investors-shouldnt-ignore-todays-high-valuation.html